Defined benefit plan

A defined benefit plan is a retirement benefit plan under which payments to former employees are fixed based on a formula. The formula typically incorporates employee earnings and/or years of service. It has no direct relationship to the funding entity's payments to the fund from which payments are made.

In this arrangement, the employer bears the investment risk, since the funds originally invested in the plan may be insufficient to pay for the fixed set of benefits guaranteed to employees. If there is a funding shortfall, the employer is required to pay additional funds into the plan.

Related Courses

Accounting for Retirement Benefits