======Defined Benefit======
A Defined Benefit (DB) plan (often simply called a traditional '[[pension]] plan') is a type of employer-sponsored retirement plan where the benefit an employee receives is calculated using a predetermined formula. Think of it as a retirement promise from your employer. They guarantee you a specific, regular income for the rest of your life once you retire. This promised amount isn't based on the stock market's whims but on factors like your salary history, age, and how long you've worked for the company. The employer is on the hook for this promise; they contribute to a pension fund, manage the investments, and bear all the [[investment risk]]. If the investments do poorly, the company must make up the difference to ensure you get your promised payout. This stands in stark contrast to its modern cousin, the [[Defined Contribution]] plan (like a [[401(k)]]), where the employee bears the investment risk, and the final retirement nest egg is unknown.
===== How Does It Work? =====
The magic behind a Defined Benefit plan is its formula. While the specifics vary, a typical formula might look something like this:
//(Annual Pension = 1.5% x Years of Service x Final Average Salary)//
Let's imagine Maria worked for a company for 30 years, and her average salary over her final few years was $80,000. Her annual pension would be:
//1.5% x 30 x $80,000 = $36,000 per year//
Maria can count on receiving $36,000 every year for the rest of her life after she retires. It’s that predictable.
The employer's job is to make sure there's enough money in the pot to pay Maria and all other retirees. They pool employee funds into a large portfolio and manage the investments. The key takeaway is that the risk – both the risk of poor investment returns and the risk that retirees live longer than expected ([[longevity risk]]) – falls squarely on the employer's shoulders.
===== The Investor's Perspective =====
==== For the Employee (The Beneficiary) ====
If you're lucky enough to have a DB plan, you're holding a valuable asset.
  * **The Good Stuff:** The biggest advantage is security. Your retirement income is predictable and guaranteed, shielding you from market volatility. You don't have to become a stock-picking wizard or worry about a market crash wiping out your savings right before retirement. It’s a passive, worry-free income stream.
  * **The Not-So-Good Stuff:** You have no control over how the money is invested. Portability is also an issue; these plans are designed to reward long-term loyalty. If you switch jobs frequently, you might not accumulate a significant benefit. Finally, your pension is only as secure as the company paying it. If the company goes bankrupt, your promised benefit could be at risk, though government agencies like the [[Pension Benefit Guaranty Corporation]] (PBGC) in the U.S. provide a safety net, insuring a portion of these benefits.
==== For the Company (The Sponsor) ====
From a company's perspective, DB plans are a double-edged sword.
  * **The Upside:** They can be a fantastic tool for attracting and retaining talent, fostering a loyal, long-tenured workforce.
  * **The Downside:** They represent a massive and unpredictable financial [[liability]]. The company must ensure the plan is adequately funded. If the plan's assets underperform or life expectancies increase, the company has to pour more cash in to cover the shortfall. This can be a huge drain on profits and a headache for management.
===== A Disappearing Act? =====
If Defined Benefit plans sound great for employees, you might wonder why they're so rare today, especially in the private sector. The simple answer is cost and risk. Since the 1980s, companies have systematically shifted away from the financial burden of DB plans. They've moved the investment risk from their own books onto the shoulders of their employees through Defined Contribution plans like the 401(k).
While they are a dying breed in corporate America and Europe, DB plans are still quite common in the public sector. Teachers, police officers, firefighters, and other government employees often still have traditional pensions as a core part of their compensation.
===== Capipedia's Corner: The Value Investor's Take =====
For the savvy value investor, the Defined Benefit plan is a crucial detail to investigate, both in your personal finances and in the companies you analyze.
  * **Analyzing a Company:** When you're digging into a company's financials, always check for a pension plan. Look in the footnotes of the [[annual report]] for the plan's //funded status//. A company with a large, underfunded pension obligation has a hidden liability that can siphon cash away from growth, dividends, and share buybacks. It’s a potential red flag that can weigh down a company's stock for years.
  * **Your Personal Finances:** If you have a pension, treat it as the bedrock of your retirement plan – a stable, bond-like asset that provides a guaranteed income floor. However, understand its limitations. Know your plan's vesting schedule and be aware of your employer's financial health. A pension is wonderful, but it's wise to build your own separate savings in a [[Roth IRA]] or other accounts to ensure a fully diversified and secure retirement.