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Defined Benefit Plans

A Defined Benefit (DB) plan is a type of pension plan that specifies the benefit an employee will receive upon retirement based on a predetermined formula which may be based on earnings, years of service, and age. The employer sponsoring a DB plan bears the investment risk whereas in a defined contribution plan such as a 401(k) Plan, the employee bears the risk. A DB plan may be unfunded or funded. An unfunded plan is similar to the USA's social security system which finances benefits on a "pay as you go" method. When a DB plan is a funded plan, assets are set aside and invested for the sole benefit of the plan. These plans are subject to strict minimum funding requirements and require the services of an actuary to administer the plan. Private employers in the US must also pay an insurance type premium to the Pension Benefit Guaranty Corporation (PBGC) whose purpose is to encourage and maintain voluntary private pension plans.

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