A type of employer-sponsored retirement plan in which the employer guarantees a fixed payment amount each year of retirement, typically based on the employee’s salary and length of time in the position. Pensions are the most common type of defined benefit plans, and are attractive to employees because retirement benefits are guaranteed and employers generally bear all the risk. However, use of these plans has declined significantly with the rise of new retirement options.
Defined benefit plan
Defined contribution plan
A type of retirement plan based on tax-deferred annual contributions to an investment account. Unlike with a defined benefit plan, the employee or contributor bears investment risk. A defined contribution plan can be employer-sponsored (also known as qualified or group trust plans) like a 401(k), or individual like an IRA.