A retirement savings mechanism structured as a defined benefit plan, yet exhibiting characteristics similar to defined contribution arrangements, features a stated account balance for each participant. This balance grows annually based on predetermined interest credits and hypothetical pay credits, irrespective of actual investment performance. For instance, an employee’s account may be credited with a fixed percentage of their salary each year, plus a guaranteed rate of interest, providing a predictable accumulation path toward retirement.
This structure offers advantages such as predictable growth, risk mitigation (as investment risk is borne by the employer), and potentially higher benefit accruals for younger employees compared to traditional defined benefit plans. Historically, these plans emerged as a way for companies to offer more portable and understandable retirement benefits, while still retaining the tax advantages associated with defined benefit plans. This approach can be particularly valuable for attracting and retaining employees in industries with high turnover or a mobile workforce.
