Which statement best describes a defined benefit retirement plan?

• A. Based on a formula
• B. Provided by the Employer
• C. Not regulated by government
• D. Invested entirely in stock options

Answer: (A)

Defined benefit plans are defined by a specific formula that determines how much you’ll receive in retirement. This formula usually uses factors such as years of service and final or average salary, with a set accrual rate to calculate the monthly benefit. Because the benefit is guaranteed by the plan sponsor, the employer bears the investment and funding risk to ensure the promised payment can be made. These plans are typically provided by employers and are regulated to protect participants. It's not accurate to say the plan is invested entirely in stock options; assets are managed to fund the guaranteed benefit, not tied to a single investment type.