Defined benefit (DB) plans define the retirement benefit that is ultimately paid to a participant. Typically, a participant will accrue a benefit (usually a fixed percent of compensation, or fixed dollar amount) for each year of credited service. The total benefit accruals at a participant’s retirement date can then be paid out in the form of an annuity (such as a single life or joint and 50% survivor annuity). In lieu of an annuity, a participant can elect to receive an actuarially equivalent single sum benefit.
An Employer is required to fund a DB plan each year with contributions in accordance with minimum funding standards. The contribution is not allocated to individual participant accounts. Instead, an unallocated or pooled account is set up to pay retirement benefits when due. The amount required each year is determined by an enrolled actuary. The Employer bears the investment risk in a DB plan. Favorable investment experience will reduce future Employer contributions, whereas adverse investment experience will increase future Employer contributions.
Tax deductible contributions to a DB plan can range from the amount required to satisfy minimum funding standards up to the maximum amount which corresponds to the plan’s unfunded current liability, as determined by an enrolled actuary.