A key advantage of defined-benefit pension plans from an employee’s perspective is
A lower risk.
B greater control over investments.
C guaranteed retirement income.
D higher potential returns.
The correct answer and explanation is:
The correct answer is C: guaranteed retirement income.
A defined-benefit pension plan is a type of employer-sponsored retirement plan that guarantees a specific income upon retirement, based on a predetermined formula. This formula typically considers factors such as the employee’s salary history, years of service, and sometimes the age at retirement. The main advantage from the employee’s perspective is the predictability and security it provides regarding retirement income.
In a defined-benefit plan, the employer takes on the responsibility of funding and managing the plan, which means the employee is not required to make investment decisions or bear the investment risk. The employer assumes the risk that the investments will perform as expected and that sufficient funds will be available to meet future obligations. Therefore, the employee knows exactly how much they will receive upon retirement, which provides financial security.
This guaranteed income is especially beneficial because it allows employees to plan for their future with greater confidence, knowing that they will receive a stable income stream once they retire. In contrast to defined-contribution plans, such as 401(k)s, where the retirement income depends on the contributions made and the investment performance, defined-benefit plans provide a fixed benefit.
While defined-benefit plans typically offer a lower level of investment risk for employees, the trade-off is usually a lower potential for high returns compared to defined-contribution plans, where employees have more control over their investments. This makes guaranteed retirement income one of the most significant advantages for employees enrolled in defined-benefit plans.