Certified Plan Sponsor Professional (CPSP) Practice Exam

How is a Defined Benefit plan generally described?

1. It provides a lump sum at termination

2. It provides variable income based on contributions

3. It guarantees retirement income to participants

4. It allows individuals to manage their own investments

The correct answer is: It guarantees retirement income to participants

A Defined Benefit plan is primarily characterized by its promise to deliver a specific and predetermined benefit to participants upon retirement. This benefit is typically expressed as a monthly annuity payment, which is based on various factors such as salary history and years of service. The essence of a Defined Benefit plan lies in its guarantee; the plan sponsor is responsible for ensuring that sufficient funds are available to meet the promised benefits, regardless of market performance or investment returns. The nature of this promise distinguishes Defined Benefit plans from other types of retirement plans. For instance, the option suggesting a lump sum payment addresses aspects of Defined Contribution plans, where participants may choose to withdraw their savings in a lump sum upon termination. Additionally, the notion of variable income based on contributions is more aligned with Defined Contribution plans, where payouts depend on the amount contributed and the investment performance. Individual investment management, as noted in another choice, pertains to defined contribution plans, where participants have the autonomy to decide how to allocate their investments. This is unlike Defined Benefit plans, where the investment decisions are made by the plan sponsor or the fund managers. In summary, the defining feature of a Defined Benefit plan is its commitment to provide a guaranteed retirement income to participants, making it a crucial component of many employee retirement benefits.