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  defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. The company administers portfolio management and investment risk for the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties.

Defined-benefit plans, aka pension plans or qualified-benefit plans, are termed "defined" because employees and employers know the formula for calculating retirement benefits ahead of time. This fund is different from other pension funds, where the payout amounts depend on investment returns, and if poor returns result in a funding shortfall, employers must tap into the company’s earnings to make up the difference.  Since the employer is responsible for making investment decisions and managing the plan's investments, the employer assumes all the investment risk.

The accumulated benefit obligation is the present value of the estimated retirement benefits earned by plan participants using their current salaries. In practice, these calculations are complex and an actuarial will perform this task using the pension plan's benefit formula. The only difference between the company's projected benefit obligation (PBO) and its accumulated benefit obligation (ABO) is the value used for the employee's compensation. While the calculation of the ABO uses the employee's current compensation, the PBO uses the employee's projected compensation at retirement.

Answer 1

Solution:-

The accumulated benefit obligation is the present value of the estimated retirement benefits earned by plan participants using their current salaries. In practice, these calculations are complex and an actuarial will perform this task using the pension plan's benefit formula. The only difference between the company's projected benefit obligation (PBO) and its accumulated benefit obligation (ABO) is the value used for the employee's compensation. While the calculation of the ABO uses the employee's current compensation, the PBO uses the employee's projected compensation at retirement:-

Companies provide employees with a pension plan as part of a larger array of employment benefits. The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period. Generally, there are three approaches to this measure, including: accumulated, vested, and projected benefit obligations.

Also known as ABO, the accumulated benefit obligation is the present value of the estimated retirement benefits earned by plan participants using their current salaries. In practice, these calculations are complex and an actuarial will perform this task using the pension plan's benefit formula. The only difference between the company's projected benefit obligation (PBO) and its accumulated benefit obligation (ABO) is the value used for the employee's compensation. While the calculation of the ABO uses the employee's current compensation, the PBO uses the employee's projected compensation at retirement.

defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. The company administers portfolio management and investment risk for the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties.

Defined-benefit plans, aka pension plans or qualified-benefit plans, are termed "defined" because employees and employers know the formula for calculating retirement benefits ahead of time. This fund is different from other pension funds, where the payout amounts depend on investment returns, and if poor returns result in a funding shortfall, employers must tap into the company’s earnings to make up the difference.  Since the employer is responsible for making investment decisions and managing the plan's investments, the employer assumes all the investment risk:-

A defined-benefit plan guarantees a specific benefit or payout upon retirement. The employer may opt for a fixed benefit or one calculated according to a formula that factors in years of service, age and average salary. The employer typically funds the plan by contributing a regular amount, usually a percentage of the employee's pay, into a tax-deferred account. However, depending on the plan, employees may also make contributions.

Upon retirement, the plan may pay out in monthly payments throughout the employee’s lifetime or as a lump-sum payment. For example, a plan for a retiree with 30 years of service at retirement may state the benefit as an exact dollar amount, such as $150 per month per year of the employee's service. This plan would pay the employee $4,500 per month in retirement. If the employee dies, some plans distribute any remaining benefits to the employee's beneficiaries.

A defined benefit plan, most often known as a pension, is a retirement account for which your employer ponies up all the money and promises you a set payout when you retire.

In general, defined benefit plans come in two varieties: traditional pensions and cash-balance plans. In both cases, you just show up for work and, assuming you meet basic eligibility rules, you’re automatically enrolled in the plan. (In some instances, however, you aren’t enrolled until you’ve completed your first year on the job.) You also need to stick around on the job for several years – typically five – to be fully “vested” in the plan.