Certified Plan Sponsor Professional (CPSP) Practice Exam

Which plan is characterized by the employer bearing the investment risk and providing specified retirement benefits?

1. Defined Contribution Plan

2. Defined Benefit Plan

3. Hybrid Plan

4. Employee Stock Ownership Plan

The correct answer is: Defined Benefit Plan

A defined benefit plan is characterized by the employer bearing the investment risk, and it guarantees specific retirement benefits to employees. In this type of plan, the employer is responsible for managing the plan’s investments and ensuring that there are sufficient funds to pay the promised benefits at retirement, regardless of the plan's investment performance. This offering is typically tied to a formula that considers factors like salary history and duration of employment, which is defined within the plan. Therefore, the responsibility for investment choices and the risk associated with those choices lies squarely with the employer. In contrast, other plan types, such as defined contribution plans, place the investment risk on individual employees who must direct their own investment choices and are not guaranteed a predetermined benefit at retirement. Hybrid plans combine aspects of both defined benefit and defined contribution plans, while employee stock ownership plans primarily focus on providing employees with ownership in the company rather than a guaranteed retirement benefit.