Certified Payroll Professional Practice Exam

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What is the primary characteristic of a defined benefit plan?

Provides varying retirement benefits based on investment performance

Guarantees a specific amount of retirement income

The primary characteristic of a defined benefit plan is that it guarantees a specific amount of retirement income to the employee upon retirement. This means that the retirement benefit is predetermined based on various factors such as salary history and years of service, providing a stable and predictable income for retirees. This structure removes the investment risk from employees, as the employer is primarily responsible for ensuring that there are sufficient funds to pay the promised benefits, regardless of the performance of investments made by the plan.

In contrast, other types of plans, such as defined contribution plans, depend on contributions made by the employee and employer along with the investment performance, which leads to varying benefits. The guarantee of a specific benefit upon retirement is what distinguishes defined benefit plans from other retirement savings vehicles, reinforcing their role in providing financial security for retirees.

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Requires employee contributions to accumulate benefits

Allows for immediate vesting upon employment

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