In a defined benefit plan, who bears the investment risk?

• A. The employee bears the investment risk
• B. The employer bears the investment risk
• C. The government bears the investment risk
• D. The plan is risk-free

Answer: (B)

In a defined benefit plan, the employer bears the investment risk. The plan guarantees a specific retirement benefit formula (often based on salary and years of service), so the sponsor must fund that benefit regardless of how investments perform. If the plan’s investments underperform, the employer must cover the shortfall to ensure promised benefits aren’t reduced. This differs from defined contribution plans, where the employee bears the investment risk because retirement income depends on investment returns. The idea that the plan is risk-free isn’t accurate, since investment performance can vary and funding gaps may arise that the employer must address.