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A defined benefit pension plan is a traditional, older style of pension plan where workers’ retirement benefits are calculated (and thus “defined”) by a formula that takes into account their years of service at the company and their salary history.  The longer an employee worked at a company, and the higher his salary, the higher his pension payments will be.

Unlike a defined contribution plan, such as a 401k, most employees under a defined benefit plan do not have to contribute a portion of their salary to the plan.  Instead, the defined benefit plan is funded entirely by the employer/sponsor of the plan. The employer/sponsor also manages the fund investments.

Defined benefit plans have numerous rules governing when retirees can start earning their pensions, along with the maximum annual amounts payable under the plan. In addition, defined benefit pension plans are not as portable as defined contribution plans, which allow a person to “rollover” the vested portion of his retirement benefits into another plan when he changes jobs.

Most government employees are covered by a defined benefit plan.  In addition, some older, mature corporations still use this type of pension plan.  In fact, defined benefit pension plans are best for large employers with a stable workforce.

As the economy’s employment dynamics have shifted to workers changing jobs frequently, rather than remaining at one workplace until retirement, defined benefit pension plans have lost their popularity.  

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