Overview: A defined benefit plan promises a specific retirement benefit calculated by a formula — the employer guarantees the outcome, not just the input.

A defined benefit (DB) plan — commonly called a traditional pension — specifies what the employee will receive in retirement. The most common formula multiplies three variables: years of service, final average salary (typically the highest three to five consecutive years), and a multiplier (usually 1% to 2.5% per year of service). For example, an employee with 30 years of service and a final average salary of $80,000, under a plan with a 1.5% multiplier, would receive an annual pension of 30 × $80,000 × 0.015 = $36,000 per year ($3,000/month).

Other formula types exist. A flat-dollar formula (common in union plans) pays a fixed amount per year of service regardless of salary — for instance, $60 per month for each year worked, giving a 25-year employee $1,500/month. A career average formula uses the employee's average pay across the entire career rather than the final years, producing smaller benefits for most workers because early-career salaries are included. Cash balance plans are a hybrid: the employer credits a hypothetical account with a pay credit (e.g., 5% of salary) plus an interest credit each year. At retirement, the accumulated balance can be taken as a lump sum or converted to a lifetime annuity.

The defining feature of a DB plan is that the employer bears all investment risk. If the pension fund's investments underperform, the employer must contribute more to keep the plan funded. If markets crash just before a wave of retirements, that is the employer's problem, not the employee's. This stands in sharp contrast to defined contribution plans where the employee's account balance fluctuates with the market.

Funding for private-sector DB plans is governed by IRC Section 430 and ERISA, which require employers to annually calculate and contribute a minimum required contribution (MRC). This involves actuaries measuring the plan's "funding target" (present value of all already-earned benefits) against plan assets. If assets fall short, the employer must make additional "shortfall amortization" payments. Missing these requirements triggers a 10% excise tax, escalating to 100% if uncorrected.

The Pension Benefit Guaranty Corporation (PBGC) is the federal insurance agency created by ERISA to backstop private-sector DB plans. Employers pay annual premiums — a flat per-participant fee plus a variable rate premium for underfunded plans — and in return, the PBGC guarantees plan benefits up to statutory limits if a covered plan terminates with insufficient assets. If a company goes bankrupt, the PBGC steps in as trustee and continues paying retirees. PBGC insurance covers single-employer and multiemployer plans through separate programs, though the multiemployer program provides financial assistance rather than direct trusteeship.