What defines a defined benefit plan?

A defined benefit plan is characterized by the fact that it guarantees a specific payout at retirement, which is often based on a formula that considers factors such as salary history and duration of employment. This means that the retirement benefit is predetermined and the employer is responsible for funding the plan to meet that commitment.

In such plans, the benefits provided at retirement are not dependent on the amount contributed by employees or investment performance, but rather on the formula established at the plan's inception. This type of plan offers a high degree of predictability for retirees, as they know exactly what to expect upon retirement.

The focus on salary history and duration particularly highlights that the longer an employee stays with the company and the higher their salary, the greater their retirement benefit will be. This incentive aligns employee interests with those of the employer, fostering loyalty and retention.

While other options might address aspects of retirement savings or contributions, they do not accurately reflect the definition of a defined benefit plan, which is the commitment to provide a specific benefit based on established criteria.