Question

Which of the following is a characteristic of a defined benefit plan?

a.) Funds are commingled.
b.) Employees assume the investment risk.
c.) Credit may not be given for prior service.
d.) Contributions are determined by a formula in the plan.

Answer 1

A defined benefit plan's characteristic is that contributions are determined by a formula within the plan, ensuring a fixed benefit upon retirement without employee investment risk.

Step-by-step explanation:

A characteristic of a defined benefit plan is that the contributions are determined by a formula in the plan. These contributions are not commingled funds, and employees do not assume the investment risk as the employer promises to pay a certain benefit upon retirement, often based on factors like salary and years of service. Traditional private company pensions are examples of defined benefit plans, where retirees receive a fixed income that does not necessarily increase with inflation, potentially eroding purchasing power over time.