Jane’s retirement plan is funded by the employer. She has been promised that she will receive a specific monthly dollar amount at retirement. Her pension benefit is calculated based on a formula where her benefit is equal to 3 percent of her average salary for the last 5 years of employment multiplied by her total years of service. Jane’s plan is a ——-

Jane’s retirement plan is funded by the employer. She has been promised that she will receive a specific monthly dollar amount at retirement. Her pension benefit is calculated based on a formula where her benefit is equal to 3 percent of her average salary for the last 5 years of employment multiplied by her total years of service. Jane’s plan is a ——-
A . Rabbi Trust
B . Defined benefit plan
C . Defined contribution plan
D . Qualified plan

View Answer

Answer: B

Explanation:

A Defined Benefit (DB) plan is a retirement plan that is funded by the employer, and promises the employee a specific monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $1000 per month at retirement – or it may calculate the employee’s benefit through a formula that includes factors such as salary, age, and the number of years worked at the company.

In a Defined Benefit (DB) plan, the employee knows beforehand what the retirement benefit will be. In a Defined Contribution (DC) plan, the employee does not know the specific retirement benefit but he/she knows what contributions are being made.

In a DC plan, the employee’s retirement benefit will be based on contributions, and investment gains/losses.