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Frequently Asked Questions: DB

Quick Review of a Defined Benefit Plan

It is an important source of pension benefits at retirement, especially for many career employees.
This is the traditional pension benefit plan many career retirees enjoy both in the public and private sectors. However it is less common now especially with large corporate employers and high tech companies. Many large corporate employers have converted their traditional pension plan to a cash balance plan, while high tech companies normally only offer a 401(k) plan.

Your pension benefits are defined.
Your pension benefits are defined by a benefit formula that depends on factors such as salary and years of service.

Most likely, you are not required to make contributions if you participate in a private sector plan.
Most plan sponsors in the private sector fund 100% of their pension plans. However, most public sector plans require employee contributions. The contributions required to fund the plan benefits are not defined, but are calculated by an enrolled actuary based on actuarial liability, plan assets, and funding method adopted by the plan sponsor.

Your benefits are protected by the Pension Benefits Guaranty Corporation (PBGC).
Because it is a defined benefit plan, it is governed by Employee Retirement Income Security Act of 1974 (ERISA) and your benefits up to a certain limit are protected by the PBGC. Your employer pays an annual premium to PBGC for this protection.

The value of your pension benefits increases with age.
Even though you your monthly pension benefits increase at a constant rate as a percent of pay, the value of the pension benefits increases with age. This is because the value is the product of monthly pension benefits times a present value factor based on your age. The present value factor increases with age.

You are not responsible to make investment choices.
Your plan sponsor is responsible for the investment of plan assets - higher returns will reduce future employer contributions, lower returns will increase future contributions. The plan assets are not separated for individual participants.

You are entitled to a benefit only after you are vested.
Private sector defined benefit plans have to adopt one of the two vesting schedules. Most private sector plans adopt 5-Year 100% vesting. You are only entitled to a pension benefit if your are vested.