CPFO Compensation & Benefits Practice Exam

A defined benefit plan is characterized by the way it determines retirement benefits for employees. Rather than relying on the individual management of retirement accounts or market fluctuations, a defined benefit plan provides a guaranteed retirement benefit calculated using a predetermined formula. This typically takes into account factors such as the employee's salary, years of service, and a defined benefit multiplier.

This formulaic approach ensures that the employee receives a specific amount of money upon retirement, regardless of the performance of the investments held by the plan. This certainty is a key feature that distinguishes defined benefit plans from defined contribution plans, where benefits are directly influenced by contributions and investment performance. The focus on a specific formula for benefits gives employees a clearer understanding of their expected retirement income.

In contrast, characteristics such as employee-directed asset management, variable benefits based on market performance, or employer contributions based on employee initiative align more closely with defined contribution plans, where individuals typically have more control over their investment choices, and retirement outcomes hinge on market conditions and personal contributions.