Tennessee Insurance Practice Exam

Which of the following is a characteristic of a defined benefit retirement plan?

1. Employer bears the investment risk

2. Employee contributes a fixed percentage

3. Benefits depend on employee contributions

4. Retirement age is fixed at 70

The correct answer is: Employer bears the investment risk

In a defined benefit retirement plan, the primary responsibility for investment risk rests with the employer. This type of plan promises a specific monthly benefit upon retirement, which is typically calculated based on factors such as the employee's salary history and length of employment. The employer must manage the investments wisely to ensure that there are sufficient funds to pay the promised benefits, regardless of market performance. In contrast, other options reflect characteristics that are not aligned with defined benefit plans. While employees might contribute in some plans, the critical distinction is that the benefit amount is guaranteed and not directly tied to individual contributions. Additionally, while some plans may have standard retirement ages, defined benefit plans do not require a fixed retirement age, allowing for variations based on the plan’s rules. Thus, stating that the employer bears the investment risk encapsulates the fundamental nature of a defined benefit plan accurately.