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Defined Benefit Plan A defined benefit plan is one that promises to pay, upon retirement, an amount specified in a formula, each year until the employee dies. (It is sometimes also possible to elect a smaller payment to be paid until both spouses die.) A formula for the annual payment amount might be something like this: 2% of salary for each year employed, up to 80% of salary, where "salary" means the average of the three highest years' salary. The other kind of plan is "defined contribution." In a defined contribution plan the thing you know with certainty is the amount you (and your employer) contribute into the plan. The plan then invests that money, typically in mutual funds. Your payout at retirement from a defined contribution plan is then based on whatever value the invested funds attain. The value of a defined benefit plan can only be estimated, and there are many unknowns: The final salary, retirement age, future interest rates, and the number of years the employee will live.
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