Question

Which of the following are Defined Benefit Pension Plans?

1. Defined Benefit Pension Plan
2. Cash Balance Pension Plan
3. Money Purchase Pension Plan
4. Target Benefit Pension Plan

a.) 1 and 2 only
b.) 1 only
c.) 1, 2, 3, and 4
d.) 3 and 4 only

Answer 1

Defined Benefit Pension Plans include Defined Benefit Pension Plans and Cash Balance Pension Plans (a.) 1 and 2 only). These plans provide a specified benefit at retirement, unlike Money Purchase and Target Benefit Plans which are defined contribution plans and depend on investment performance for their retirement benefits.

Step-by-step explanation:

Among the options given, Defined Benefit Pension Plans include both Defined Benefit Pension Plans and Cash Balance Pension Plans. These plans promise a specified retirement benefit amount, which is usually calculated through a formula based on factors such as salary history and length of employment. The option that includes both a Defined Benefit Pension Plan (1) and a Cash Balance Pension Plan (2) as Defined Benefit Pension Plans is a.) 1 and 2 only.

In contrast, Money Purchase Pension Plans and Target Benefit Pension Plans are types of defined contribution plans, where the contributions are defined, but the benefit received at retirement depends on the investment's performance.

Traditionally, defined benefit plans have offered retirees a predictable income stream, independent of the investment's success. These benefits do not typically increase with inflation, which, over time, can erode purchasing power. However, these plans are less common now, with most employers shifting towards defined contribution plans like 401(k)s and 403(b)s, which are more flexible and wherein retirement benefits depend on the accumulation and investment performance of the contributed funds.