What is a defined-benefit plan?

A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. Usually, employees are required to work for a specific amount of time before they become eligible to participate in the plan.

What are the different types of defined benefit plans?

There are two main types of defined benefit plans: pensions and cash balance plans. People typically understand a defined benefit plan to be a pension: A guaranteed monthly benefit starting at retirement, based on a formula that factors in how long a worker remained with a company and how much they earned.

What is a defined-contribution plan?

In defined-contribution plans, the benefit is not known, but the contribution is. It comes in a designated amount from the employee, who has a personal account within the plan and chooses investments for it. As investment results are not predictable, the ultimate benefit at retirement is undefined.