What are defined-benefit retirement plans?
Defined-benefit plans provide pension income to retired employees on the basis of a formula that accounts for a worker’s years of service at a firm and earnings. Distributions are typically made for the remainder of the employee’s life, making the plan similar to an annuity. Contributions are generally made by the employer only, who is responsible for determining what level of contributions is necessary to provide the promised benefits to all current and future employees. Contributions to defined-benefits plans are tax-deferred, meaning that neither the employer nor the employee pays tax on the initial contributions or accumulated earnings. • Compared with other types of retirement accounts, the risk in a defined-benefit plan is borne mostly by the employer. If employees live longer in retirement than anticipated, or if the investments financing the employees’ pensions fail to meet expectations, it is the employer’s responsibility to increase contributions so as to make good on the pro
