What Is a Defined Benefit Plan?

A defined benefit plan is a retirement plan by which employers provide guaranteed retirement benefits to employees based on a set formula. These plans, often referred to as pension plans, have become less and less common in recent decades. This decline is especially pronounced in the private sector, where more and more employers have shifted to defined contribution plans, like a 401(k). There are still employers offering defined benefit plans, though they mostly exist in the public sector.

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Understanding Defined Benefit Plans

In a defined benefit plan, a company takes charge of its workers’ retirement income. Using a formula based on each worker’s salary, age and time with the company, an employer will pay into and manage a retirement plan. In retirement, the workers draw a dependable check from the company plan, regardless of how the market performs, which defines the benefits. The company bears the risk of stock market fluctuations, meaning that the worker doesn’t have to worry that a downturn will make retirement unaffordable.

Payments are usually provided as a monthly pension, though some plans offer lump-sum distributions. The stability of these payouts makes defined benefit plans attractive to employees, particularly those who spend many years with the same employer.

If you’re wondering why a company would do this, decades ago a company could reasonably expect many of its workers to stick around for the duration of their careers. In turn, a pension that increased in value the longer employees stayed with the company helped to keep employees with their employers.

The Decline of Defined Benefit Plans

Defined benefit plans have become less common in the U.S. due to shifting employer preferences, regulatory changes and economic pressures. Companies have moved toward defined contribution plans, like 401(k)s, to reduce financial risk and administrative costs. Unlike defined benefit plans, which require employers to guarantee payouts regardless of market conditions, defined contribution plans shift investment responsibility to employees.

When 401(k)s were first introduced in 1978, there were 128,407 private defined benefit plans in the U.S., according to Department of Labor data. These pension plans were still on the rise in the following years, peaking at 172,642 in 1986. But the number of private pensions has dropped precipitously since then. By 2022, there were only 46,508 private defined benefit plans in the U.S., compared to more than 750,000 defined contribution plans.

Regulatory changes, such as stricter funding requirements and accounting standards, have also made defined benefit plans less attractive to businesses. Additionally, workforce mobility has increased, with fewer employees staying at a single company long enough to benefit from pension plans. As a result, many private-sector employers have phased out defined benefit plans in favor of more flexible, cost-efficient retirement options. However, they remain common in government and unionized industries, where long-term job security and pension funding commitments are more stable.

The State of Defined Benefit Plans in 2025

Defined benefit plans are now primarily found in government, unionized and certain legacy corporate pension programs.

Nowadays, having a generous 401(k) with a high employer match is the new gold standard for employees. In addition, more and more workers are hopping from job to job every few years rather than staying for the long haul. This has led to a shift in responsibility from employers to employees.

Many of today’s remaining defined benefit plans have been “frozen.” This means the company is phasing out its retirement plan, though it’s waiting to do so until the enrollees surpass the age requirement. In a “soft freeze,” no new employees can join the plan, but workers already participating in it continue to accrue benefits. In a “hard freeze,” a company closes the plan to new employees and freezes benefit accrual, too.

Pros and Cons of Defined Benefit Plans

Just like any other type of retirement plan, defined benefit plans have their advantages and disadvantages. While these plans generate guaranteed income for retirees, they lack the flexibility of their defined contribution counterparts.

Pros of Defined Benefit Plans

Financial stability: Provides guaranteed retirement income, ensuring retirees do not outlive their pension funds.
Predictable payments: Benefits are paid in a specific format, removing uncertainty about the amount and timing of distributions.
Inflation protection: Many plans include cost-of-living adjustments, helping to preserve purchasing power over time.
Low fees: Typically feature lower administrative costs compared to individual retirement accounts or defined contribution plans.

Cons of Defined Benefit Plans

Lack of investment control: Employers manage the investments, preventing employees from choosing how their retirement funds are allocated.
Reduced flexibility: Designed to reward long-term employment, making it harder to transfer benefits when changing jobs.
Potential benefit loss: Leaving an employer before full vesting can result in lower projected retirement benefits.

Defined Benefit Plans vs. Defined Contribution Plans

The defined benefit plan used to be common, particularly in heavily unionized industries, like the auto industry. Today, though, retirement plans that depend on contributions from employees have largely supplanted them.

These are, appropriately enough, known as “defined contribution plans.” The rules of defined benefit plans usually require worker participation, whereas participation in defined contribution plans is often optional. Some companies offer both defined benefit and defined contribution plans.

The key difference between each of these employer-sponsored retirement plans is in their names. With a defined contribution plan, it’s only the employee’s contributions (and the employer’s matching contributions) that are defined. The benefits they receive in retirement depend on how the employee invests, how the market performs and the rate at which the employee chooses to withdraw their balance.

On the other hand, defined benefit plans ask the employer to take on the risk, and the employee retirement benefits are specific and predictable. Again, the employee’s salary, time working at the company, age and other factors affect the size of their eventual benefits.

Defined Benefit Plans vs. 401(k) Plans

Defined benefit plans and 401(k) plans are two distinct types of retirement savings arrangements. A defined benefit plan, often referred to as a pension plan, guarantees a specific monthly benefit to retirees, typically based on factors like salary history and years of service. The employer bears the investment risk, ensuring that the promised benefits are available upon retirement, regardless of market performance.

In contrast, a 401(k) plan is a defined contribution plan where employees contribute a portion of their salary, often with optional matching contributions from the employer. The employee is responsible for investment decisions, and the retirement income depends on the account’s performance over time. While defined benefit plans offer predictable income, they are less common due to high employer costs. 401(k) plans, on the other hand, provide flexibility and portability but expose employees to investment risks and uncertain retirement outcomes.

The Solo Defined Benefit Plan

There is a way certain savers can start a DIY-defined benefit plan. It builds off of contributions you make yourself, without any help from your employer. So if you’re self-employed or have your own outside income, you can set up your plan. The contribution limits are generous, and you can deduct your contributions at tax time. It’s also a great way to make catch-up contributions to your retirement savings if you’ve put savings off.

The problem with making your own defined benefit plan is that you have to meet the annual minimum contribution floor. If you don’t, you’ll violate IRS rules. Because the benefits of a defined benefit plan are very specific, you have to keep funding the plan to ensure it will pay those benefits in your retirement. Plus, you’ll need an actuary to perform an actuarial analysis each year.

These “solo defined benefit plans” are good options for people with a lot of income who want to save and who don’t mind losing a bit of flexibility in the process.

Bottom Line

If you’re fortunate enough to have a defined benefit plan through your employer, learn about its ins and outs. This doesn’t mean that you shouldn’t save elsewhere though, like in a Roth or traditional IRA. That’s because the promise of a pension isn’t as iron-clad as it once was. When it comes to saving for retirement, more is always better.

Retirement Planning Tips

To maximize your retirement savings, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Don’t forget to factor Social Security into your retirement plans. SmartAsset’s Social Security calculator can help you determine what kind of monthly benefit you can expect.