Retirement Plans 101: Defined Benefit vs. Defined Contribution

When it comes to retirement planning, two common types of plans are defined benefit (DB) and defined contribution (DC). While both help you save for retirement, they work in very different ways.

What Is a Defined Benefit (DB) Plan?

A DB plan promises a specific monthly benefit when you retire. The amount is usually based on a formula that includes your years of service, salary, and a benefit factor.

Key features:

• You receive guaranteed lifetime income after retirement.
• Your benefit amount is not affected by market performance.
• The plan is professionally managed and funded through employer contributions and investment earnings.

Example: PSRS/PEERS is a DB plan. If you work, become vested, and later retire, your monthly benefit is calculated using a set formula and paid for life.

What Is a Defined Contribution (DC) Plan?

A DC plan is more like a savings account for retirement. You and/or your employer contribute money to the account, and the final amount you have at retirement depends on how much was contributed and how well the investments performed.

Key features:

• You choose how to invest your money.
• Retirement income depends on your account balance.
• You bear the investment risk.

Example: A 403(b) or 401(k) plan is a DC plan. You contribute money during your career, and when you retire, you use the balance to support yourself, either by withdrawing funds or purchasing an annuity.

Quick Comparison

Why It Matters

Understanding the difference helps you plan better for retirement. DB plans offer security and predictability, while DC plans offer flexibility and control. Many educators rely on DB plans as their primary retirement income and may use DC plans to supplement it.