Defined benefit plans are retirement plans that provide a specified monthly benefit to participants based on a formula that typically takes into account factors such as the participant’s salary history and years of service. These plans are a type of employer-sponsored pension plan and are designed to provide retirees with a guaranteed income stream for life.
There are several types of defined benefit plans, each with its own characteristics and requirements. One common type of defined benefit plan is the traditional pension plan, which is often offered by large corporations and government entities. Under this plan, the employer assumes all the investment and longevity risks, and employees receive a predetermined benefit amount upon retirement.
An alternative type of defined benefit plan is the cash balance plan. This plan is a hybrid between a traditional pension plan and a defined contribution plan. Participants in a cash balance plan have individual accounts that grow over time with contributions from both the employer and the employee. Upon retirement, the participant can choose to receive a lump sum or an annuity-based payment.
Traditional Defined Benefit Plans
Traditional defined benefit plans are one of the types of defined benefit plans available to employees. These plans are designed to provide a specific, predetermined retirement benefit to eligible employees based on factors such as salary, years of service, and age.
Under a traditional defined benefit plan, the employer bears the investment risk and is responsible for funding the plan. The employer makes regular contributions to the plan and invests the funds to generate returns that will be used to pay the retirement benefits to employees.
Features of Traditional Defined Benefit Plans
Employer-funded: In traditional defined benefit plans, the employer is responsible for funding the plan and making contributions to ensure that there are sufficient funds to pay the promised benefits to employees.
Predictable retirement benefits: The retirement benefits provided by a traditional defined benefit plan are predetermined based on factors such as salary, years of service, and age. This provides employees with a predictable income stream during retirement.
Investment risk borne by the employer: The employer assumes the investment risk in a traditional defined benefit plan. This means that if investment returns are lower than expected, the employer must make additional contributions to ensure that the plan has enough funds to pay the promised benefits.
Actuarial calculations: Traditional defined benefit plans often require actuarial calculations to determine the amount of contributions needed to fund the plan. Actuaries use various factors and assumptions to estimate the future benefit payments and calculate the required contributions.
Qualified plan: Traditional defined benefit plans must meet certain requirements set by the Internal Revenue Service (IRS) to be considered qualified plans. Meeting these requirements allows the employer to receive certain tax benefits.
Overall, traditional defined benefit plans provide employees with a secure and predictable retirement benefit, while placing the investment and funding risk on the employer.
Cash Balance Plans
A cash balance plan is a type of defined benefit plan that combines elements of both traditional defined benefit plans and defined contribution plans. Like traditional defined benefit plans, cash balance plans provide employees with a guaranteed retirement benefit. However, unlike traditional defined benefit plans, which typically specify the benefit as a monthly payment, cash balance plans express the benefit as an account balance.
In a cash balance plan, the employer contributes a specified amount, either a percentage of the employee’s salary or a flat dollar amount, to each employee’s account every year. This contribution grows at a predetermined interest rate, often tied to the performance of certain investments. Over time, the account balance accumulates, and the employee is entitled to receive the balance as a lump sum payment or as an annuity when they retire.
One of the key advantages of cash balance plans is their portability. Because the benefit is expressed as an account balance, employees can take their accumulated balance with them if they leave the company before retirement. This is different from traditional defined benefit plans, where the benefit is usually forfeited if the employee leaves before reaching retirement age.
Another advantage of cash balance plans is that they provide employees with a sense of ownership over their retirement savings. This can lead to increased employee engagement and satisfaction, as employees can see their retirement savings grow over time.
Overall, cash balance plans offer a flexible and attractive retirement benefit option for both employers and employees. They provide the security and guaranteed income stream of a defined benefit plan, while also offering the portability and ownership features of a defined contribution plan.
Hybrid Defined Benefit Plans
Hybrid defined benefit plans are a type of retirement plan that combines elements of both defined benefit and defined contribution plans. These plans provide employees with a guaranteed benefit upon retirement, similar to a traditional defined benefit plan, but also offer some flexibility and control over investment decisions, similar to a defined contribution plan.
Types of Hybrid Defined Benefit Plans
There are several types of hybrid defined benefit plans, including:
- Cash balance plans: These plans credit employees with a percentage of their annual salary, plus a fixed interest rate. The benefit is typically based on the employee’s account balance at retirement.
- Target benefit plans: These plans set a targeted benefit amount for each employee based on factors such as age, salary, and years of service. Contributions are made to the plan to help achieve these target benefits, and the actual benefit is determined at retirement based on the account balance.
- Floor-offset plans: These plans provide a traditional defined benefit formula for a certain portion of the employee’s salary, with any additional benefits provided through a separate defined contribution plan. The defined benefit portion acts as a floor for the overall benefit.
Hybrid defined benefit plans can offer certain advantages over traditional defined benefit plans, such as portability, transparency, and flexibility. However, they also come with their own complexities and considerations, so it’s important for employers and employees to carefully evaluate the options and potential implications before choosing a plan.
Public Sector Defined Benefit Plans
Public sector defined benefit plans are retirement plans offered to employees by governmental organizations and agencies. These plans provide a specific and guaranteed retirement benefit based on factors such as an employee’s salary, years of service, and age at retirement.
There are various types of public sector defined benefit plans, including:
- Pension plans: These plans typically provide a fixed monthly retirement benefit based on an employee’s final average salary and years of service. The benefit is often calculated using a formula that takes into account the employee’s salary and years of service.
- Deferred compensation plans: These plans allow employees to defer a portion of their compensation until retirement. The deferred amount is then paid out in the form of regular retirement payments or a lump sum.
- Hybrid plans: These plans combine elements of both defined benefit and defined contribution plans. They often offer a guaranteed retirement benefit, but also provide employees with the opportunity to make additional contributions to a separate account.
Public sector defined benefit plans are typically funded by a combination of employee contributions, employer contributions, and investment returns. The goal is to ensure that there are sufficient funds to pay the promised retirement benefits to employees once they become eligible.
Corporate Defined Benefit Plans
Corporate defined benefit plans are a type of pension plan offered by companies to their employees. These plans provide a specific benefit amount to employees upon retirement, based on factors such as salary and years of service.
There are several types of corporate defined benefit plans:
Traditional Defined Benefit Plans
A traditional defined benefit plan is the most common type of corporate pension plan. With this type of plan, employers promise their employees a specific monthly benefit amount upon retirement, typically based on a formula that incorporates years of service and final average salary.
This formula often takes into account the employee’s highest consecutive years of earnings, commonly referred to as final average compensation. The benefit amount is usually determined by multiplying the average salary by a factor that increases with years of service. This means that employees who work for the company longer and have higher salaries will receive a higher benefit amount.
Cash Balance Plans
Cash balance plans are a type of defined benefit plan that is becoming more popular among companies. With this type of plan, employers contribute a set amount of money to each employee’s individual account each year. The account balance grows with interest and is adjusted annually based on the company’s performance.
Unlike traditional defined benefit plans, cash balance plans provide employees with a specified account balance at retirement, rather than a fixed monthly benefit amount. This gives employees more flexibility in managing their retirement savings and allows them to potentially receive a larger payout if the investments perform well.
However, cash balance plans may also carry more investment risk for employees, as they are exposed to market fluctuations. If the investments perform poorly, employees may receive a lower payout than expected.
In conclusion, corporate defined benefit plans are a valuable employee benefit that provides retirees with a specific monthly benefit amount or account balance. The two main types of corporate defined benefit plans are traditional defined benefit plans and cash balance plans.
Multiemployer Defined Benefit Plans
A multiemployer defined benefit plan is a type of pension plan that is established by a collective bargaining agreement between a labor union and multiple employers. These plans are typically found in industries where the workforce is represented by a union, such as construction, transportation, and manufacturing.
Multiemployer defined benefit plans are designed to provide retirement benefits to employees who have worked for multiple employers within the same industry or trade. The funds contributed to these plans are pooled together and managed by a board of trustees, which is typically made up of an equal number of representatives from the labor union and the participating employers.
One of the main advantages of multiemployer defined benefit plans is that they offer portability of benefits. This means that employees who change employers within the same industry can maintain their accrued retirement benefits and continue to accrue additional benefits under the plan.
These plans also provide a reliable and predictable source of retirement income for participating employees. The retirement benefit is typically based on a formula that takes into account the employee’s years of service and average salary or wage during the peak earning years.
However, multiemployer defined benefit plans face unique challenges. Since they are jointly sponsored by both the labor union and the participating employers, the financial health of the plan is dependent on the financial health of the contributing employers. If one or more employers become financially distressed or go out of business, it can impact the ability of the plan to meet its benefit obligations.
In conclusion, multiemployer defined benefit plans play a vital role in providing retirement security for employees in industries with a unionized workforce. These plans offer portability of benefits and a reliable source of retirement income, but they also face financial challenges due to the shared responsibility between the labor union and the participating employers.
Solo 401(k) Plans
Solo 401(k) plans are a type of defined benefit plan that is designed for self-employed individuals or small business owners with no employees, except for a spouse. These plans are also known as individual 401(k) plans or one-participant 401(k) plans.
With a solo 401(k) plan, the self-employed individual has the ability to contribute both as an employee and an employer. As an employee, they can contribute a certain percentage of their compensation, up to a specified limit set by the IRS. As an employer, they can make additional contributions on behalf of themselves.
One of the main advantages of a solo 401(k) plan is the higher contribution limits compared to other types of defined benefit plans. For the year 2021, the total contribution limit for a solo 401(k) plan is $58,000 for individuals under the age of 50, and $64,500 for individuals who are 50 years or older. These limits include both the employee and employer contributions.
Another benefit of solo 401(k) plans is that they offer a range of investment options. The account holder has the flexibility to invest in a variety of assets, including stocks, bonds, mutual funds, and real estate. This allows for greater diversification and the potential for higher returns.
Additionally, solo 401(k) plans offer the option for loans. The account holder can borrow money from their plan for any purpose, such as purchasing a home or starting a business. However, it is important to note that there are specific rules and requirements that must be met to qualify for a loan.
Overall, solo 401(k) plans provide self-employed individuals with a tax-advantaged way to save for retirement. They offer higher contribution limits, investment flexibility, and the option for loans. It is important for individuals to consult with a financial advisor or tax professional to determine if a solo 401(k) plan is the right choice for their specific needs and goals.
(b) Plans
There are several types of defined benefit plans that fall under the category of “(b) Plans”. These plans are designed to provide specific benefits to employees upon retirement. The main types of (b) plans include:
| Traditional Pension Plans | These plans are also known as final salary or career average plans. They provide a fixed monthly benefit to employees based on their years of service and salary at retirement. The benefit amount is typically calculated using a formula that takes into account the employee’s average salary over a specific period of time and their years of service. |
| Cash Balance Plans | These plans are a hybrid between a traditional pension plan and a defined contribution plan. They provide employees with a specific account balance at retirement, which is determined by the employer’s contributions and a specified interest rate. The benefit is typically expressed as a lump sum, although some plans may offer the option for employees to convert the balance into an annuity. |
| Church Plans | These plans are specific to employees of religious organizations and are exempt from certain tax requirements. They operate similarly to traditional pension plans, providing a fixed monthly benefit based on the employee’s years of service and salary at retirement. |
These (b) plans offer employees a guaranteed retirement benefit, providing them with financial security in their golden years. It’s important for both employers and employees to understand the specific details and requirements of each plan to make informed decisions about retirement planning.
Simplified Employee Pension (SEP) Plans
Simplified Employee Pension (SEP) Plans are a type of defined benefit plan that allows employers to contribute to an employee’s retirement savings. These plans are popular among small businesses and self-employed individuals because of their simplicity and flexibility.
Under a SEP plan, employers can make tax-deductible contributions to a SEP-IRA (individual retirement account) on behalf of their employees. The contributions are based on a percentage of the employee’s salary and are entirely funded by the employer.
Benefits of SEP Plans
SEP plans offer several benefits for both employers and employees:
- Easy to establish and maintain: SEP plans have minimal administrative requirements and paperwork compared to other retirement plans. This makes them an attractive option for small businesses with limited resources.
- Tax advantages: Employers can deduct SEP plan contributions as a business expense, reducing their taxable income. Employees also benefit from tax-deferred growth on their SEP-IRA investments until they start withdrawing the funds in retirement.
- Flexible contribution amounts: While the employer must contribute an equal percentage of salary for all eligible employees, the specific contribution percentage can vary from year to year. This allows employers to adjust their contributions based on business performance.
Eligibility and Participation
To be eligible for a SEP plan, employees must meet the following criteria:
- Be at least 21 years old
- Have worked for the employer in at least three of the past five years
- Have received at least $600 in compensation during the year
Once eligible, employees are automatically enrolled in the SEP plan and receive contributions from the employer. However, employees are not allowed to make their own contributions to the SEP-IRA.
Simplified Employee Pension plans provide a straightforward and cost-effective way for employers to help their employees save for retirement. By offering tax advantages and flexibility in contributions, SEP plans can be an attractive retirement benefit for both employers and employees.
Defined Benefit Pension Plans for Small Business Owners
Defined benefit pension plans are a type of retirement plan that provide a guaranteed benefit to employees based on a specific formula. While these plans are commonly associated with larger corporations, they can also be advantageous for small business owners.
Advantages of Defined Benefit Plans for Small Business Owners
- Tax Savings: Contributions made to a defined benefit plan are tax-deductible for the employer, which can help to reduce the business’s taxable income.
- Higher Contribution Limits: Compared to other retirement plans, defined benefit plans allow for much higher contribution limits, which can enable business owners to save more for retirement.
- Retirement Security: Defined benefit plans offer a predictable retirement income, as the benefit amount is determined by a specific formula. This can provide small business owners with peace of mind in their retirement planning.
Considerations for Small Business Owners
While defined benefit plans can offer significant advantages, there are some considerations that small business owners need to keep in mind:
- Cost: The cost of administering a defined benefit plan can be higher compared to other retirement plan options. It is important for small business owners to carefully evaluate the potential costs and benefits before implementing a plan.
- Financial Stability: As the employer is responsible for funding the defined benefits, it is essential for small business owners to maintain financial stability to ensure that they can meet their obligations to plan participants.
Overall, defined benefit pension plans can be an attractive option for small business owners who are looking for retirement plan options that provide tax advantages, higher contribution limits, and retirement security. However, it is important to carefully consider the costs and financial implications before implementing a plan.
State Retirement Systems
In addition to private sector plans, there are also state retirement systems that offer defined benefit plans to their employees. These plans provide retirement benefits to state government workers.
State retirement systems usually have different types of plans available for employees. These include:
- Traditional Pension Plans: These plans provide a specific monthly benefit based on factors such as years of service and salary history.
- Cash Balance Plans: These plans have elements of both defined benefit and defined contribution plans. They provide a hypothetical account balance that grows with contributions and interest credits.
The benefits provided by state retirement systems are an important part of the overall compensation package for state government employees. These plans help ensure that employees have a secure retirement and can rely on a steady stream of income after they retire.
Teacher Retirement Systems
Teacher Retirement Systems are a type of defined benefit plan that specifically cater to the retirement needs of teachers. These plans are designed to provide teachers with a secure and reliable stream of income during their retirement years.
Teachers contribute a portion of their salary towards their retirement, and in return, the retirement system promises to pay them a certain amount of money each month upon retirement. The amount of the monthly pension is typically based on a formula that takes into account factors such as the teacher’s years of service and final average salary.
One of the key features of teacher retirement systems is the guarantee of a fixed monthly income for life. This provides teachers with financial security and peace of mind, knowing that their retirement income is not subject to market fluctuations or investment risks.
Another important aspect of teacher retirement systems is the ability to retire at a relatively young age. Many teachers have the option to retire after a certain number of years of service, often as early as age 55. This early retirement option allows teachers to enjoy their retirement years while still being in good health and able to pursue other interests or part-time work.
In addition to the pension benefit, teacher retirement systems often offer other retirement benefits such as health insurance coverage and cost-of-living adjustments to help retirees keep up with inflation.
Overall, teacher retirement systems play a crucial role in providing teachers with a secure and stable retirement. These defined benefit plans are specifically tailored to the needs of educators, offering them a reliable source of income and a fair return for their years of service.
Military Pension Plans
Defined benefit plans are common in the military, providing a guaranteed pension for retired servicemembers. There are several types of military pension plans, each with its own set of requirements and benefits.
One type of military pension plan is the Final Pay plan. Under this plan, retired servicemembers receive a pension based on a percentage of their final basic pay. The percentage varies depending on the number of years of service, with a maximum of 75% after 30 years. This plan is available for servicemembers who entered service before September 8, 1980.
The High-3 plan is another type of military pension plan. This plan calculates the pension based on the average of the highest three years of basic pay. The percentage of the pension also varies depending on the years of service, with a maximum of 75% after 30 years. This plan is available for servicemembers who entered service after September 7, 1980.
The Career Status Bonus/REDUX plan is a third type of military pension plan. This plan offers a smaller pension than the Final Pay and High-3 plans, but includes a lump-sum bonus at the 15-year mark. Retired servicemembers under this plan receive a pension based on the average of the highest three years of basic pay, multiplied by a percentage determined by their years of service. This plan is available for servicemembers who entered service on or after August 1, 1986.
In addition to these plans, there are special pension programs for certain military groups, such as reserve and National Guard members. These programs have their own rules and requirements for eligibility.
Military pension plans provide retirees with a stable and reliable source of income in their post-military lives. Understanding the different types of plans can help servicemembers make informed decisions about their retirement options.
| Plan | Eligibility | Pension Calculation |
|---|---|---|
| Final Pay | Servicemembers who entered service before September 8, 1980 | Percentage of final basic pay based on years of service |
| High-3 | Servicemembers who entered service after September 7, 1980 | Percentage of average highest three years of basic pay based on years of service |
| Career Status Bonus/REDUX | Servicemembers who entered service on or after August 1, 1986 | Percentage of average highest three years of basic pay based on years of service, with lump-sum bonus at 15-year mark |
Union Pension Plans
Union pension plans are a type of defined benefit plans that are established through collective bargaining agreements between labor unions and employers. These plans provide retirement benefits to union members based on a formula that takes into account factors such as years of service and earnings history.
Features of Union Pension Plans
Union pension plans typically offer generous retirement benefits to union members. These benefits are funded through contributions from both the employer and the employee, with the employer typically making larger contributions. Contributions are invested in a fund that is managed by professional investment managers to ensure growth over time.
One key feature of union pension plans is that they provide a guaranteed benefit amount to retirees. This means that the retiree will receive a specified monthly benefit for the rest of their life, regardless of how the investments in the fund perform. This provides retirees with a sense of security and stability in their retirement years.
Advantages of Union Pension Plans
Union pension plans offer several advantages to union members. Firstly, these plans provide a reliable and predictable source of retirement income, which can be especially important for individuals who do not have access to other retirement savings options.
Secondly, union pension plans often provide additional benefits such as survivor benefits, which ensure that the spouse or dependents of a deceased retiree continue to receive a portion of the retirement benefit. This can provide financial security to the retiree’s family even after their passing.
| Advantages | Disadvantages |
|---|---|
| Guaranteed retirement benefits | Less control over investment decisions |
| Additional benefits such as survivor benefits | Potential funding issues |
| Reliable and predictable source of retirement income |
In conclusion, union pension plans are a type of defined benefit plans that offer secure and predictable retirement benefits to union members. These plans provide financial stability and peace of mind for retirees, making them a valuable component of overall retirement planning.
Government Employee Pension Plans
Government employee pension plans are a type of defined benefit plan that is specifically designed for employees of governmental entities. These plans provide retirement benefits to employees based on a formula that takes into account factors such as salary, years of service, and age.
There are several types of government employee pension plans, each with its own set of rules and benefits:
1. Federal Employee Retirement System (FERS)
FERS is the retirement plan for employees of the federal government. It consists of three main components: a basic pension plan, Social Security, and the Thrift Savings Plan (TSP) – a defined contribution plan.
2. State and Local Government Plans
State and local government employee pension plans vary depending on the specific jurisdiction. These plans are typically funded by contributions from employees and employers, and they often provide a more generous pension formula than those offered in the private sector.
Some states have hybrid plans that combine a defined benefit component with a defined contribution component, such as cash balance plans or hybrid plans that combine traditional pensions with individual accounts.
3. Military Retirement System
The military retirement system provides benefits to members of the armed forces who serve for a certain number of years. This system includes a defined benefit pension plan, as well as other benefits like healthcare and survivor benefits.
In conclusion, government employee pension plans are an important benefit for public sector employees. These plans offer a reliable source of retirement income and often provide more generous benefits than those offered in the private sector.
| Plan Type | Benefit Structure |
|---|---|
| Federal Employee Retirement System (FERS) | Defined Benefit + Defined Contribution |
| State and Local Government Plans | Varies – Defined Benefit or Hybrid Plan |
| Military Retirement System | Defined Benefit |
Police and Firefighter Pension Plans
Police and firefighter pension plans are types of defined benefit plans that are specifically designed for individuals who work in law enforcement or fire services. These plans provide retirement benefits to police officers and firefighters based on a formula that takes into account their years of service and salary.
There are different types of police and firefighter pension plans depending on the specific jurisdiction and the needs of the employees. Some common types of plans include:
1. Final Average Pay Plans
Under this type of plan, the retirement benefit is calculated based on the average salary of the employee during the final years of service. This provides an incentive for police officers and firefighters to stay on the job until retirement and earn a higher salary.
2. Years of Service Plans
In this type of plan, the retirement benefit is determined by the number of years an individual has worked as a police officer or firefighter. The longer the individual has served, the higher their retirement benefit will be.
Police and firefighter pension plans often provide additional benefits such as disability coverage and survivor benefits for the families of officers or firefighters who are killed in the line of duty.
These types of defined benefit plans are crucial in attracting and retaining qualified individuals to work in law enforcement and fire services. They provide a stable retirement income for these public servants who risk their lives to protect and serve their communities.
Social Security
Social Security is a defined benefit plan that provides retirement, disability, and survivor benefits to eligible individuals. It is a federal program that is financed through payroll taxes, with contributions made by both employees and employers.
Under the Social Security system, workers earn credits based on their earnings and the number of years they have worked. These credits determine the amount of benefits an individual is eligible to receive. To qualify for retirement benefits, a worker must earn a minimum number of credits, which is determined based on their age at the time of retirement.
In addition to retirement benefits, Social Security also provides disability benefits. These benefits are available to workers who have a medical condition that prevents them from working and are expected to last for at least one year or result in death. The amount of disability benefits is based on the worker’s earnings prior to becoming disabled.
Survivor benefits are another important aspect of Social Security. These benefits are provided to the spouse, children, or other dependents of a deceased worker. The amount of survivor benefits depends on the worker’s earnings and the relationship of the survivor to the worker.
Overall, Social Security is an important defined benefit plan that helps provide financial security for retired, disabled, and surviving individuals.
Q&A:
What is a defined benefit plan?
A defined benefit plan is a type of retirement plan in which the employer promises a specified monthly benefit to the employee upon retirement. The benefit amount is typically based on a formula that considers the employee’s years of service and salary history.
What are the advantages of a defined benefit plan?
One of the advantages of a defined benefit plan is that the employee has a guaranteed income in retirement. Unlike other retirement plans, such as a defined contribution plan, the employee does not need to worry about investing or managing their retirement savings. The employer is responsible for funding and managing the plan.
What are the different types of defined benefit plans?
There are several different types of defined benefit plans. Some common types include traditional pension plans, cash balance plans, and floor-offset plans. Each type has its own unique features and benefits. Traditional pension plans provide a monthly benefit for life, while cash balance plans provide a hypothetical account balance that can be converted into a monthly benefit. Floor-offset plans combine a traditional pension plan with a defined contribution plan.
What happens if a company cannot afford to fund its defined benefit plan?
If a company cannot afford to fund its defined benefit plan, it may be forced to freeze the plan or terminate it altogether. In some cases, the plan may be taken over by the Pension Benefit Guaranty Corporation (PBGC), a federal agency that guarantees certain pension benefits. However, if the PBGC does take over the plan, the benefit amount may be reduced.
Can an employee participate in both a defined benefit plan and a defined contribution plan?
Yes, an employee can participate in both a defined benefit plan and a defined contribution plan, as long as the plans are offered by the same employer. This is known as a dual-qualified plan. The employee can receive benefits from both plans upon retirement, providing a combination of a guaranteed income and potential investment growth.
What is a defined benefit plan?
A defined benefit plan is a type of retirement plan where employers promise to pay their employees a specific benefit amount upon retirement, based on a predetermined formula.
What are the advantages of a defined benefit plan?
Defined benefit plans provide a predictable retirement income for employees, regardless of market performance. They also typically offer higher contribution limits and can be beneficial for employees who plan on working for the same company for many years.
How are benefits calculated in a defined benefit plan?
The calculation of benefits in a defined benefit plan usually takes into account factors such as an employee’s salary, years of service, and age at retirement. Employers use a specific formula to determine the benefit amount.
What are the potential risks of a defined benefit plan?
One potential risk of a defined benefit plan is that the employer may not be able to fulfill their promise to pay the specified benefit amount. This can happen if the company’s financial situation deteriorates or if the plan’s investments do not perform well. Additionally, employees may have limited control over how the funds are invested.