What is a defined benefit plan (pension)?

A defined benefit plan, commonly known as a pension, is characterized by its guarantee of a specific amount in retirement benefits. This type of plan promises employees a predetermined payout upon reaching retirement age, based on a formula that typically considers factors such as salary history and years of service. The defining feature is its assurance of a fixed income for retirees, providing them with financial security and predictability in their retirement years.

In contrast, options like a retirement plan dependent on stock market performance highlight plans that are more variable and subject to market fluctuations, such as 401(k)s or other investment-driven accounts. A savings account monitored by the government refers to standard savings accounts that do not have the same retirement benefits structure and do not provide specific retirement payouts. Similarly, a type of employee savings plan usually entails voluntary contributions from employees rather than guaranteed benefits; these plans are more reliant on individual contributions and market performance, lacking the security and predictability that a defined benefit plan offers.