What are defined-benefit retirement plans?
Lifetime annuities promised by employers and, in most cases, partially guaranteed by the federal government.
In contrast to other types of retirement accounts, the risk in a defined-benefit plan is borne mostly by the employer. If retired employees live longer than anticipated, or if the investments financing the employees’ pensions fail to meet expectations, it is the employer’s responsibility to increase contributions to make good on the promised benefits. Defined-benefit plans are thus more likely to be offered by large employers, who are better suited to bear the risk and to spread fixed administrative costs across larger numbers of participants.
However, not all the risk falls on employers. Defined-benefit plans are insured by the Pension Benefit Guarantee Corporation, a federal entity which ensures that retired employees receive at least some of their benefits if their employers are unable to pay the promised sums in full.
Defined-benefit plans have been falling in popularity (at least among employers) over the past few decades. From 1991 to 2003, the share of full-time employees at medium-size and large establishments with defined-benefit plans fell from 59 percent to 33 percent. Over the next 12 years, that share fell to just 25 percent. Defined-benefit plans, however, are still the most common type of plan for government employees.
Congressional Budget Office. 2011. Use of Tax Incentives for Retirement Saving in 2006. Washington, DC: Congressional Budget Office.
Employee Benefit Research Institute. 2015. EBRI Databook on Employee Benefits. Washington, DC: Employee Benefit Research Institute.