Defined Benefit Plan

In a defined benefit plan, the benefit is fixed first and the funding follows. Each year you work, you accrue part of a future benefit under the plan’s formula. Actuaries estimate what the plan must hold today to pay every accrued benefit later, and the employer contributes to a single pooled trust to close any gap. If the trust’s investments do badly, the employer owes more; if they do well, it can contribute less. Your promised benefit does not change either way.

The plan pays in full at its normal retirement age, often 65, and many plans allow early retirement at a reduced benefit. Most private-sector plans are insured by the Pension Benefit Guaranty Corporation (PBGC). Many public plans also require employees to contribute a set share of pay, so a teacher’s or police officer’s pension is often funded by both sides.

Many traditional plans use a final-average-pay formula: a benefit multiplier, such as 1.5% or 2%, times your years of credited service, times your average pay over a stretch near the end of your career, for example your highest three or five years. Other plans use career-average pay, a flat dollar amount per year of service, or a cash balance design. The plan document defines every term, including what counts as pay and how part-time years are credited.

The formula rewards long service with one employer, because both the years and the pay in it grow over a career. Leaving mid-career freezes your average pay at its level then, which is why 30 years split between two plans usually pays less than 30 years in one, part of the pull behind golden handcuffs.

The tax code caps the result. For 2026, the annual benefit a plan may pay at retirement age is limited to $290,000, or 100% of your average pay for your highest three years if lower, and only the first $360,000 of pay can count in the formula. The cap is reduced for benefits starting before 62.

Vesting decides how much of the employer-funded benefit you keep if you leave. Any contributions you made yourself are always yours. For the employer’s part, federal law allows a private plan to choose between two minimum vesting schedules, and a plan may vest faster. A vested benefit left with a former employer normally waits in the plan until you reach its retirement age, unless the plan pays it out as a lump sum. Federal, state and local government plans are not covered by ERISA, so they set their own vesting rules.

A cash balance plan is a defined benefit plan that looks like an account. Each year the plan credits a hypothetical account with a pay credit, such as 5% of salary, and an interest credit, either fixed or tied to an index. When you leave, the plan must offer the benefit as a lifetime annuity, and many also let you take the balance as a lump sum.

The balance is a bookkeeping figure, not money invested in your name. The plan holds one pooled trust, and as the Department of Labor explains, the employer keeps both the gains and the losses on its investments, while your account grows by the promised credits whatever markets do. That separates it from a defined contribution plan, where your balance rises and falls with your own investments. Because benefits build more evenly and travel more easily, cash balance plans suit job changers better than a traditional formula, and most private ones are PBGC-insured, like most traditional pensions.

A defined benefit plan takes the two hardest retirement risks off your hands: markets and outliving your money. The trade-off is less control and less portability, and a value that depends heavily on how long you stay. When you weigh a pension job against one that pays more but offers only a 401(k), treat the pension as lifetime income closer to an annuity than to a pile of savings, and price what it would cost to buy that income yourself.