This is a plan that provides a benefit that is determined by the terms of the plan document. The contribution is actuarially determined as the amount necessary to fund the promised benefit. The law does not limit the contribution; rather, it limits the ultimate benefit that can be paid from the plan. The maximum benefit is a life annuity of $210,000 a year, payable at age 62. It is decreased for commencement ages lower than 62, and increased for commencement ages later than 65.
It is also reduced if the participant doesn’t have 10 years of participation at the time of commencement.
Example: DB plan provides a benefit of $15,500 a month life at age 62.
Dr. A is 50 years old. Assuming a 5.5% rate of return on investments, the annual contribution to fund his benefit is $123,000 per year.
Dr. B is 40 years old. Assuming a 5.5% rate of return on investments, the annual contribution to fund his benefit is $49,500 per year.
Who Bears the Investment Risk? In a Defined Benefit plan, because the benefit is guaranteed, the investment risk lies with the employer. The amount of the participant’s benefit cannot vary based on the performance of the plan assets. If the trust performs better than assumed, the required contribution decreases. If it performs worse than assumed, the required contribution increases over time. There cannot be any participant investment choice -all assets are pooled and trustee-directed.