a defined benefit plan is an employer sponsored retirement plan where employee benefits are computed using a formula that considers several factors such as length of employment and salary history usually employees are required to work for a specific amount of time before they become eligible to participate in the plan they might also require a waiting period after breaks in service 
the company is responsible for managing the plan s investments and risk and will most often hire an outside investment manager to oversee the plan typically an employee cannot just withdraw funds as with a 401 k plan rather they become eligible to take their benefit as a fixed monthly payment like an annuity or in some cases as a lump sum at an age defined by the plan s rules understanding defined benefit plansalso known as pension plans or qualified benefit plans this type of plan is called defined benefit because employees and employers know the formula for calculating retirement benefits ahead of time and they use it to define and set the benefit payout this fund is different from other retirement funds like retirement savings accounts where the payout amounts depend on investment returns since the employer is responsible for making investment decisions and managing the plan s investments the employer assumes all the investment and planning risks poor investment returns or faulty assumptions and calculations can result in a funding shortfall where employers are legally obligated to make up the difference with a cash contribution examples of defined benefit plan payoutsa defined benefit plan guarantees a specific benefit or payout upon retirement the employer may opt for a fixed benefit or one calculated according to a formula that factors in years of service age and average salary the employer typically funds the plan by contributing a regular amount usually a percentage of the employee s pay into a tax deferred account however depending on the plan employees may also make contributions the employer contribution is in effect deferred compensation upon retirement the plan may pay monthly payments throughout the employee s lifetime or as a lump sum payment for example a plan for a retiree with 30 years of service at retirement may state the benefit as an exact dollar amount such as 150 per month per year of the employee s service this plan would pay the employee 4 500 per month in retirement if the employee dies some plans distribute any remaining benefits to the employee s beneficiaries selecting the right payment option is important because it can affect the benefit amount the employee receives it is best to discuss benefit options with a financial advisor 