A defined benefit plan is a type of retirement plan sponsored by an employer. The Employee Retirement Income Security Act (ERISA) covers two types of retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan is commonly called a “Pension”.
A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service – for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).
Fewer and fewer employers offer defined benefit plans because they are very expensive for the employer. Some examples are Union Pensions, Public Employee pensions and some very large employers offer pensions.
Many defined benefit plans will send out annual statements to the participants in the plan. Those statements inform the participant about the future monthly benefit (the ‘defined’ part) but also indicate a cash or surrender value. The surrender value is quite often much less valuable than the Present Value of the future benefit. It is for this reason that it can be an irreparably bad decision to ‘cash in’ a defined benefit plan. There are few assets safer and more reliable than defined benefit pension plans.
To better understand defined benefit plans, reach out to a member of Zoller|Biacsi Co LPA to learn more and see the present value of your or your spouse’s plan.
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