Traditional Defined Benefit Plan

Traditional Defined Benefit Plan

Definition

In short, a traditional defined benefit plan is a defined benefit plan that calculates the benefits for individual participants based on formulas established in the Plan Document, using years of service, and the employee’s age and pay to calculate a future monthly retirement benefit that will commence at the employee’s normal retirement age.

Explanation

To clarify, in a defined benefit plan the participants’ benefits are not based on segregated or allocated account balances. Instead, assets are held in an aggregated Trust account that is available to pay benefits when they are due. Benefits are determined solely by calculations and are not affected by asset performance. Thus, the employer bears the risk associated with asset performance. As a result, the employer’s contributions to the plan are determined based on projected benefits to all employees, and actuarial methods are applied to determine the level of contribution needed to fund the future benefits over a period of future years related to the future working lifetime of the participants.

 

 

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