Massachusetts State Life Insurance Practice Exam

What type of pension plan relies on employer contributions determined by employee factors rather than company profitability?

1. Defined benefit plan

2. Hybrid plan

3. Defined contribution plan

4. Mandatory plan

The correct answer is: Defined contribution plan

A defined benefit plan is the correct choice because it relies on predetermined contributions based on employee factors such as age, salary, and years of service, rather than on the profitability of the company. This type of pension plan guarantees a specific payout at retirement, which is calculated using a formula that considers these employee-specific factors. In contrast, defined contribution plans are dependent on contributions made by both the employer and the employee, and the eventual benefits depend on the performance of the investments made with those contributions. Hybrid plans combine elements of both defined benefit and defined contribution plans but still do not solely rely on employee factors in the same way that defined benefit plans do. Mandatory plans refer to government-required pensions, which may not specifically relate to employer contributions based on employee characteristics.