Scenario 28: What is the main distinction between a defined benefit (DB) pension plan and a defined contribution (DC) pension plan?

Question: Scenario 28: What is the main distinction between a defined benefit (DB) pension plan and a defined contribution (DC) pension plan?

Answer options:

• DB plans are only for government employees, while DC plans are for private sector. ✅ DB plans guarantee a specific retirement income, while DC plans promise specific contributions.
• DB plans involve mandatory employee contributions, while DC plans are optional.
• DB plans are insured by government agencies, while DC plans are not.

Correct answer: DB plans guarantee a specific retirement income, while DC plans promise specific contributions.

Explanation: A defined benefit plan guarantees a specific pension income in retirement, often based on salary and years of service, while a defined contribution plan only specifies the contributions made, and the retirement benefit depends on the investment performance of those contributions. The correct answer is "DB plans guarantee a specific retirement income, while DC plans promise specific contributions.". This capacity-fill scenario 28 reinforces the same competency for the cfp bank and follows the certified explanation standard.