Understanding defined benefit (DB) plans, commonly referred to as a pension, can help you better plan your retirement.
4 min read | July 13, 2022
A pension, a defined benefit plan: Both terms refer to a unique program, less used now than in the past, that offers employees a retirement income stream after they work a certain number of years. It’s also a benefit that prompts a lot of questions. Here are answers to what you should know about DB plans.
It depends, but usually no. Most defined benefit plans are employer sponsored, which means your workplace fully funds your enrollment. Some may require an employee contribution, but most do not, says Sharyl Priester, senior learning and development specialist at Principal ® .
Each year during the defined benefit plan’s anniversary process, employers update the tenure and salary of each employee or former employee enrolled. During that anniversary period, you’ll also receive a defined benefit statement with estimated retirement-age benefits. “Typically, a pay increase and an additional year of service will result in an increased benefit,” Priester says.
No; the expected defined benefit payout is just an estimate. You’ll get an exact calculation once you have an exact retirement date.
Defined benefit plans are individual, based on the plan’s exact benefit calculation, your years of service, and your salary. “Unless you and your coworker started on the exact same day and have held the exact same position and salary through the years, you can’t compare statements or benefits,” Priester says.
Yes; the savings in a defined benefit plan are pre-tax, so you haven’t paid any income tax on them yet. You’ll have to pay income tax once you begin receiving payouts.
No. Whether other payout options are available depends on the plan. To learn more about payout options the plan may offer, read “What is a defined benefit plan?”
Generally no, but check the provisions of the plan. Survivor benefits are typically limited to someone who is closer to your age, such as a spouse, brother, or sister, Priester says. Or a plan may limit the survivorship benefit to a certain period, if younger beneficiaries are allowed.
Yes; the benefit will decrease to accommodate a projected benefit for your survivor. That’s because the defined benefit plan will extend what’s already been saved over a longer period to provide those benefits.
The defined benefit payout option you choose depends on the expectations that you and your family have about retirement income. “What’s your end goal?” Priester says. “Are you single or do you have a spouse that might be relying on that income? Be proactive about understanding your choice.”
If the service of the plan allows it, yes. But check if the plan requires forms such as a spousal consent or notary in writing so you have everything in place before requesting a payout.
If the plan allows it. But understand that if there is a total provided on a statement, it won’t match any cash-out value. For exact figures, contact your plan representative.
Most plans allow benefits to start at age 65, but some allow for early withdrawals starting as young as age 55 (although that will impact the payout amount). “If you elect early benefits, it most likely will equal a reduction in monthly benefit totals,” Priester says. Learn more about how defined benefit plans work with other retirement savings.
It depends on when you file your request, as well as the processing lead time of your program. Check with your defined benefit plan for specifics.
No; the federal government requires that your employer set aside the pool of money that’s owed to you. Once you begin receiving payouts, those payouts remain the same until the end of your payout option, up to an amount guaranteed by the government, no matter what happens to the company.
