Defined benefit plan

A defined benefit plan — traditional pension — guarantees employees a specific monthly retirement income calculated from a formula incorporating years of service, salary history, and an accrual rate, with the investment risk borne entirely by the employer. The organization must invest plan assets to fund future obligations and bears the full shortfall risk if investment returns underperform actuarial assumptions. Defined benefit plans are declining rapidly in the private sector due to cost unpredictability and funding complexity, but remain common in public sector employment where they are a significant recruitment and retention tool. The most critical ongoing HR responsibility is ensuring employees understand the vesting schedule — the years of service required before retirement benefits are earned — since plan design details are frequently misunderstood and create expectations that differ from actual entitlements.