Retirement Plan Insights
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Defined Benefit Plans
A defined benefit plan promises each employee a specific monthly benefit payable at the retirement age specified in the plan. Defined benefit plans are usually funded solely by the employer – instead of by both the employer and the employee, as is the case with most defined contribution plans.
With defined benefit plans, the employer is responsible for contributing enough funds to the plan to pay the promised benefits regardless of profits and earnings.
This type of plan allows for higher contributions and therefore can result in quicker accumulation of retirement funds, making it ideal for employers who want to shelter more than the annual defined contribution limit.
These plans have specific formulas for determining a fixed monthly retirement benefit, usually based on each employee's compensation and years of service.
Benefits may be integrated with Social Security, which reduces the plan's benefit payments based upon the employee's Social Security benefits. Defined benefit plans may permit employees to receive the benefit in a form other than monthly benefits, such as a lump sum payment.
Based on each employee's projected retirement benefit and assumptions about investment performance, years until retirement, employee turnover, and life expectancy, the actuaries at American Pension Advisors will determine your company’s necessary yearly contribution.
This required contribution varies from year to year based on investment gains and loses, as well as transfer of funds from non-vested accrued benefits at the time of employees leaving the company.