Maintains a solvency fund to pay benefits if a company goes bankrupt and cannot pay its retiree benefits.
Unlike defined contribution plans in defined benefit plans the employer, not the employee bears all the planning and investment risks. Benefits can be paid in monthly installments like an annuity or in one lump sum. In a defined benefit plan an employer promises an employee a pension upon retirement.
In a defined benefit plan the employer, not the employee bears the greatest risk. Defined contribution plans offer valuable tax benefits. Where these include pre-tax contributions that reduce the employee's taxable income and potential employer tax credits or after-tax loss contributions that provide the employee with tax-free income after retirement.
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