What is a defined benefit plan?

A defined benefit plan provides employees with a pre-determined, fixed amount on retirement as a pension. The benefit or payout is determined by how long the employee has worked for the business and the salary drawn during his employment at the business.

The employer contributes all or most of the funds for the defined benefit plan and decides where to invest the funds. The employee receives the promised or defined amount irrespective of whether the invested funds provide more returns or not. Typically, employees need to stay vested or work for a fixed number of years in the business before they are eligible for the defined benefits on retirement.