Defined Benefit or Defined Contribution: What Did the Employer Promise?
Defined contribution promises what goes into the plan. Defined benefit promises what eventually comes out to the employee.
Defined contribution
The employer promises a contribution, such as a specified amount or matching formula. The employee generally bears more investment-performance risk.
Defined benefit
The employer promises a future retirement benefit and therefore bears substantially more actuarial and investment risk.
Accounting complexity
Defined benefit accounting can involve benefit obligations, plan assets, service cost, interest-related components, and actuarial assumptions.
Exam shortcut
Defined contribution means promise the funding. Defined benefit means promise the benefit.
The takeaway
Identify whether the employer promised a contribution or a future benefit. That determines where the major investment and actuarial risk sits.
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FAQ
Which plan generally creates more actuarial complexity?
Defined benefit.
Does the employer guarantee investment returns in every defined contribution plan?
No.
Is defined contribution expense usually simpler?
Yes.