what is a defined benefit pension plan

A defined benefit pension plan is a type of retirement plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employees earnings history, tenure of service, and age. In contrast to defined contribution plans, such as 401(k)s, where the payout amounts depend on investment returns, a defined benefit plan guarantees a specific benefit or payout upon retirement. The benefit is calculated in advance using a formula based on age, earnings, and years of service. The employer is responsible for all of the planning and investment risk of a defined benefit plan, and the benefits can be distributed as fixed-monthly payments like an annuity or in one lump-sum payment. Defined benefit plans distribute their benefits through life annuities, where employees receive equal periodic benefit payments (monthly, quarterly, etc.) for the rest of their lives. A defined benefit plan is also known as a pension plan or qualified-benefit plan.