What is a Defined Benefit Plan?

A defined benefit plan is an employer-sponsored retirement plan that provides a predetermined benefit. Defined benefit plans require the employer to promise a designated retirement benefit and then fund the plan as necessary to meet that benefit obligation. The benefit objective is the controlling force under a defined benefit plan and the contribution amounts are simply a factor of that controlling force. If the investments in a defined benefit plan perform poorly, the employer must contribute increased amounts in subsequent years to counteract the poor investment performance and ensure that the plan will be able to satisfy the predetermined benefit objectives. Although defined benefit plans may allow for a larger dollar contribution than other employer plans, the costs of maintaining a defined benefit plan generally are quite high in comparison.