CPFO Compensation & Benefits Practice Exam 2025 – Complete Prep Guide

A defined benefit plan is a type of retirement plan where an employer guarantees a specific retirement benefit amount for employees based on a formula that typically takes into account factors such as salary history and years of service.

The key aspect of a defined benefit plan is that the investment risk associated with the plan is borne by the employer. This means that the employer is responsible for ensuring that there are enough assets in the plan to meet the promised retirement income obligations. Additionally, employees receive a predictable income stream, which is a significant advantage of this type of plan. This guarantee of a specified level of retirement income is often appealing because it provides financial security for employees in their retirement years.

Unlike defined contribution plans, where the retirement benefit is dependent on employee contributions and investment performance, defined benefit plans focus on delivering a predetermined benefit based on the established formula. This distinction reinforces the importance of understanding how the employer's role in managing the investments and risks influences the employee's retirement outcome.