There are three types of defined benefit plans: flat, unit and variable benefit. The Flat Benefit formula is a way of calculating an employer’s contribution to an employee’s plan. The benefit is determined by multiplying an employee’s months of service by a flat monthly rate that is predetermined. Another alternative involves a specific payment as long as a minimum term of service is reached.
In the first case the employer may have to contribute a specific percentage to the employee’s retirement plan for each month they have worked with the company. In the second instance the employer may have an agreement in place to pay a specific percentage of the average earnings of the last five years of employment. In both cases the plan could require that the employee work for the company for a minimum number of years.
Regardless of the formulation the defined benefit plan is a type of employer-sponsored retirement plan. A traditional style of pension plan, such plans leave the employer fully responsible for making all contributions. In some cases the employee may make contributions as well. These plans are generally found only at larger companies that can afford the expense.
Since these plans don’t require employee contributions they don’t get to make any investment decisions either. The employer is fully in charge of how the monies are invested and they assume all the risk. Furthermore, the employer is responsible for funding the plan regardless of how their investments turned out. In some circumstances the benefits may be extended to beneficiaries if the employee dies prematurely.
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