The correct answer is: C. Both A & B
A defined benefit plan is a pension plan in which the employer promises to pay a specified monthly benefit at retirement, usually based on the employee’s salary and years of service. The benefit is not directly tied to the amount of money that the employer contributes to the plan, or to the investment earnings of the plan assets.
In a defined benefit plan, the employer bears the investment risk. If the plan assets do not earn enough to cover the promised benefits, the employer must make up the difference. This can be a significant financial burden for employers, especially in times of low interest rates or market volatility.
Defined benefit plans are becoming increasingly rare in the United States. Many employers have switched to defined contribution plans, in which the employer contributes a fixed amount of money to the plan, but the employee bears the investment risk. Defined contribution plans are less expensive for employers, but they also offer less certainty about retirement income.
Here is a brief explanation of each option:
- A. Contributions
In a defined benefit plan, the employer’s contributions are not directly tied to the amount of the benefit that the employee will receive at retirement. The employer may choose to contribute a fixed amount of money each year, or a percentage of the employee’s salary. The amount of the contribution is based on a number of factors, including the employer’s financial resources, the employee’s age and years of service, and the expected rate of return on the plan assets.
- B. Investment earnings
The investment earnings of a defined benefit plan are also not directly tied to the amount of the benefit that the employee will receive at retirement. The plan assets are invested in a variety of assets, such as stocks, bonds, and real estate. The investment earnings are used to pay the benefits of current retirees, and to fund the benefits of future retirees.
- C. Both A & B
As explained above, the amount of the benefit in a defined benefit plan is not directly tied to the amount of the employer’s contributions, or to the investment earnings of the plan assets. The benefit is determined by a formula that takes into account the employee’s salary, years of service, and age at retirement. The employer bears the investment risk, and must make up any shortfall between the amount of the promised benefits and the amount of the plan assets.