Defined Benefit Plan 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). Contributions are determined by the plan’s actuary each year.  The actuary uses certain assumptions about projected service and salary, benefits, participant demographics and expected asset performance to determine the annual cost of benefits to be paid to participants upon retirement.  Defined benefit plans are favored by employers who want to provide a fixed income to participants and to whom discretion in the amount of contributions is not necessary.  Employers who wish to maximize deductions often adopt defined benefit plans since the contributions permitted may be much greater than those permitted in a defined contribution plan.

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