Legal Definitions - fixed-benefit plan

A fixed-benefit plan, also commonly known as a defined benefit plan, is a type of retirement plan where an employer promises a specific, predetermined payment or stream of payments to an employee upon their retirement. The amount of this benefit is typically calculated using a formula that considers factors such as the employee's salary history, their years of service with the company, or a flat amount. Under this type of plan, the employer is responsible for investing the funds and bears the investment risk, ensuring that the promised benefit can be paid out to retirees. Employees know in advance what their retirement benefit will be, making it "fixed" from their perspective, as the employer guarantees the outcome rather than just the contribution amount.

• Example 1: Corporate Pension

  After working for "Global Manufacturing Corp." for 35 years, Eleanor retires. Her retirement plan promises her an annual pension equal to 1.5% of her average highest five years' salary for each year of service. Based on her salary history, she is guaranteed to receive $45,000 per year for the rest of her life.

  This is a fixed-benefit plan because Eleanor's retirement income is a specific, predetermined amount calculated by a clear formula (1.5% * 35 years * average highest 5 years' salary). Global Manufacturing Corp. is obligated to pay this exact benefit, regardless of how well its pension fund investments perform.

• Example 2: Public Sector Retirement System

  David, a municipal firefighter, is part of his city's pension system. The system's rules state that upon retirement, he will receive a monthly pension equal to 2% of his final average salary for every year he served. After 28 years of service, his final average salary qualifies him for a monthly payment of $4,000.

  This scenario illustrates a fixed-benefit plan because David's retirement income is precisely defined by a formula known in advance. The city's pension system is responsible for managing its assets to ensure it can consistently pay David this predetermined monthly amount throughout his retirement.

• Example 3: Union-Negotiated Plan

  Members of the "United Tradesmen's Union" participate in a multi-employer pension fund. The fund's agreement specifies that any member who completes 30 years of service with a participating employer will receive a monthly pension of $3,000 upon retirement, regardless of their specific salary history.

  This is a fixed-benefit plan because the retirement benefit ($3,000 per month) is a specific, predetermined amount that the pension fund promises to pay qualifying members. The union and participating employers are collectively responsible for contributing enough to the fund to ensure this fixed benefit can be delivered to all eligible retirees.