Future Business Leaders of America (FBLA) Personal Finance Practice Test

What does a defined-benefit employer pension plan specify?

1. The amount of savings required for retirement

2. The benefits you will receive at retirement

3. The investment strategy for retirement funds

4. The level of risk involved in pension investments

The correct answer is: The benefits you will receive at retirement

A defined-benefit employer pension plan specifically details the benefits you will receive upon retirement, often based on various factors such as salary history and years of service. Unlike defined-contribution plans, where the focus is on the savings and investment made by the employee, a defined-benefit plan guarantees a specific payout at retirement, providing financial security and predictability for the employee. This type of plan assures the employee that they will receive a fixed monthly benefit or lump sum upon retirement, which is calculated according to a predetermined formula. This certainty can help individuals with long-term financial planning, knowing exactly what they can expect during retirement based on their employment and contributions. The other options relate to aspects of retirement planning but do not accurately describe the core function of a defined-benefit pension plan. While saving for retirement is essential, the plan does not specify savings amounts or investment strategies; it purely outlines the benefits that will be delivered once the employee is eligible to retire.