Defined Benefit Plan

Millions of Americans are covered by defined benefit plans. If you are covered by a defined benefit plan, you should get to know your defined benefit plan very well. You should know what your defined benefit plan guarantees you will receive and what the restrictions of your defined benefit plan are.

How does a defined benefit plan work?

A defined benefit plan guarantees to pay you a specific amount when you retire based on:

• your salary
• your age
• years of service

Who guarantee the defined benefit plan? What is the defined benefit plan backed by?

The defined benefit retirement plan is backed by a government insurance agency called the Pension Benefit Guaranty Corporation or PBGG. Cash balance pension plans are also defined benefit plans and are also backed by the same Pension Benefit Guaranty Corporation or PBGG agency.

The purpose and design of the defined benefit plan

Defined benefit plans are designed with the purpose of, when combined with social security benefits, replacing 60%  - 70% of an employee's pre-retirement income.

Which defined benefit plan is better - traditional defined benefit plan or cash balance defined benefit plan?

There have been some studies to determine which defined benefit retirement plan type is better - traditional defined benefit plan or the cash balance defined benefit plan. The results show that for those people who change jobs often, cash balance defined benefit plans yield larger benefits than traditional defined benefit plans.

Women, for example, usually change jobs more often than men because of children and other reasons. Research shows that it is more beneficial for women to have cash balance defined benefit plans than traditional defined benefit plans.

Cash balance defined benefit plan

When a company converts their employer retirement plan (or part of) to a cash balance plan, the company usually set up an opening balance for the employee based on the the benefits accrued in the traditional pension employer retirement plan up to the time of conversion. The law forbids companies to forego any benefits accrued in the pension employer retirement plan up to the time of change. This law governing the conversion to cash balance defined benefit plan is outlined in the Retirement Security and Savings Act of 2000.  This Retirement Security and Savings Act of 2000 law was passed to insure that when a traditional defined benefit plan is converted to a cash balance defined benefit plan or other retirement plan types, the new and converted retirement plan has the same benefits as the old one prior to the conversion. A defined benefit calculation is used to calculate the monthly retirement benefits.