Which type of retirement plan promises a defined payout at retirement?

• A. Defined contribution plan
• B. Cash balance plan
• C. Defined contribution plan with guaranteed returns
• D. Defined benefit plan

Answer: (D)

A plan that promises a defined payout at retirement is a defined benefit plan. In this arrangement, the retirement benefit is predetermined by a formula, usually based on final salary and years of service, and the employer guarantees this specific payout (the benefit amount) for life. The risk for meeting that promise is borne by the plan sponsor, not the individual.

In contrast, a defined contribution plan fixes how much is contributed, but the retirement payout depends on investment performance, so the final amount isn’t guaranteed. A cash balance plan is a hybrid that credits a notional account with a guaranteed interest rate, but the way benefits are accumulated and paid out differs from a straightforward fixed-payout defined benefit. A plan with guaranteed returns still centers on contributions and credits rather than a guaranteed, formula-based retirement benefit.