A Traditional Defined Benefit Plan is a Defined Benefit Plan (DBP) that calculates the benefits for individual Participants based on formulas in the Plan Document, such as 50% of pay paid monthly starting at age 65. Traditional Defined Benefit Plans use a formula based on an employee's Years Of Service, age, and pay, to calculate a future monthly retirement benefit that will commence at their Normal Retirement Age (also specified by the document).
Pension Plans traditionally sponsored by large corporations are examples of Defined Benefit Plans. The same long-standing laws and regulations that govern the large corporate Pension Plans are available for small DB Plans covering just one or only a few Participants, with certain variations. The plan design features of small DB Plans can be especially beneficial for entrepreneurs approaching retirement.
A DB Plan is NOT an Individual Account Plan: the Participants' benefits are NOT based on segregated or allocated account balances. Instead, assets are held in an aggregated Trust fund that is available to pay all benefits when they come due. The actual benefits paid out from the Trust are determined by the Plan Formula and by certain Actuarial Assumptions. That is, benefits are determined solely based on calculations and are not affected by asset performance.
Because the benefits to be paid from a DB Trust are based on formulas and not asset performance, this means that the Employer bears the risk associated with the asset performance. The Employer's contributions to a DB Plan are determined based on the projected benefits for all employees compared against the aggregate Trust fund available to pay the benefits. Benefits are projected and valued and actuarial methods are applied to determine the level of contribution needed to fund the future benefits over a period of future years related to the future working lifetime of the Participants.