defined benefit plan

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A defined benefit plan promises to pay out a specific benefit at an employee’s retirement. This is usually based on an employee’s total service and average salary earned in the years just before retirement, though the formula is sometimes a flat percentage of pay. Benefits are usually paid out as an annuity, though lump sum payouts may be available, depending on the plan’s provisions. The employer bears the investment risk in a defined benefit plan. If the investment funds do not perform well enough to pay the promised benefits at retirement, the employer’s contributions to the plan will increase.

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