In a defined benefit plan, an employer typically guarantees a worker a specific lifetime annual retirement income, based on years of service, final rate of pay, age and other factors. The risks of paying for the plan rest entirely with the employer.
Many defined benefit plans permit employees to convert their future income into a lump-sum payment at retirement. Federal pension insurance generally protects retirees who opt for annual income, but workers who opt for lump-sum payoffs are on their own to invest their sums wisely.
Social Security is the most widespread defined benefit plan. It gives most retired workers an annual pension based on their lifetime incomes, adjusted annually for inflation
LifeWire, a part of The New York Times Company, provides original and syndicated online lifestyle content. David Fisher is a freelance writer based in Bend, Ore. In addition to 25 years as an editor and reporter, he has worked as a professional financial adviser.
