DB plans are considered “traditional pension” plans. Employee retirement payments are based on a pre-set formula and takes into account:
- Years of credited service
- Final average salary
- The plan benefit accrual rate (multiplier) determined by the employer
For Example: 10 (years of credited service) x $30,000 (final average salary) x .05 (accrual rate/multiplier) = $15,000 (annual pension benefit).
Employers who place a high value on retaining employees for long periods of time have often elected to utilize a DB plan.
Employees who desire long term employment stability are attracted by a DB retirement plan that allow them to orderly plan for their retirement. When employees recognize the overall value of a DB plan offered by their employer and when employers can recognize that a DB plan will help facilitate tangible economic growth with highly satisfied and highly dedicated employees, a DB plan can be a sustainable and cost-effective benefit supported by both parties. Employees may be required to make contributions to assist with funding their retirement benefit (decided by employer’s board).
How is a defined benefit plan funded?
- Employer contributions
- Employee contributions
- Earnings on investments