Principles of Risk Management and Insurance, 13th Edition

Defined-Benefit Plans

Traditional Defined-Benefits Plans

From a historical perspective, employers typically established defined-benefit plans that paid guaranteed benefits to retired workers. In a defined-benefit plan, the retirement benefit is known in advance, but the contributions will vary depending on the amount needed to fund the desired benefit. For example, assume that James, age 50, is entitled to a retirement benefit at the normal retirement age equal to 50 percent of average pay for the highest three consecutive years of earnings. An actuary then determines the amount that must be contributed to produce the desired benefit.

In a defined-benefit plan, the benefit amount can be based on career-average earnings, which is an average of ...