Final answer:
A defined benefit plan is a type of pension plan where retirees receive a predetermined monthly benefit, often calculated based on salary and years of service. This contrasts with defined contribution plans like 401(k)s, which are funded by employer and employee contributions and subject to the investment choices made by the employees themselves.
Step-by-step explanation:
A defined benefit pension or retirement plan is required to pay out a certain level of pension to employees, regardless of the amount available in the plan. Unlike defined contribution plans like 401(k)s and 403(b)s, where the employer contributes a fixed amount to the worker's retirement account on a regular basis, and the employee may also contribute, defined benefit plans promise a specified monthly benefit upon retirement. This benefit is often calculated through a formula that considers factors such as salary history and duration of employment.
Defined benefit plans offer the advantage of a predictable income stream in retirement, but they also carry the risks associated with managing the investments and longevity of the fund. With the trend shifting towards defined contribution plans, these risks are largely transferred to employees, who must now manage their own retirement savings and investment choices. This shift has increased the portability and potential for real rates of return, offering some protection against inflation—unlike defined benefits plans, which are traditionally fixed and do not typically adjust for inflation over time.