What is a major difference between a defined benefit plan and a defined contribution plan?

A defined benefit plan guarantees a payout at retirement, which is a crucial characteristic that distinguishes it from a defined contribution plan. In a defined benefit plan, the benefits are usually calculated based on factors such as salary history and years of service, ensuring that the participant knows the amount they will receive upon retirement, which provides a predictable income stream.

This certainty in retirement income is one of the primary advantages of defined benefit plans for employees, as it allows for better financial planning in retirement. Conversely, a defined contribution plan does not guarantee a specific payout; instead, it relies on contributions made by both the employer and employee, with the final retirement benefit dependent on the performance of the investments made with those contributions.

Understanding this distinction is important for individuals who are assessing their retirement savings options, as it impacts their retirement security and planning strategies.