Difference Between Defined Benefit & Defined Contribution Plans

The General Municipal Law defines a Defined Benefit Plan and Defined Contribution Plan as follows:

2.“Defined benefit plan” means any service award program that provides to eligible volunteer firefighters, a benefit that is definitely determinable under the program without reference to the amount contributed to the program on the participant’s behalf or to any income, expenses, gains or losses or forfeitures of other participants under the program.

3.“Defined contribution plan” means any service award program that provides to eligible volunteer firefighters a benefit as the result of definite and determinable contributions under the program, and without reference to any income, expense, gains or losses or forfeitures of other participants under the program.

An easy way to understand the difference is to boil it down to two basic components - the benefit that is provided and the cost of providing that benefit. 

In defined benefit plan, what is known, or defined, is the benefit that the volunteer will receive. Such as, $20 per month per year of service, payable at age 65. What is unknown is what that promised benefit will cost the program sponsor. The cost will be based on how long that volunteer lives to collect that benefit, and how much investment income the sponsor earns on the contributions made to fund the benefit.

In a defined contribution plan, what is known, or defined, is the contribution the sponsor makes. For example, a $500 contribution into the participant's account for each year of service credit earned. What is unknown is the benefit the participant will be paid at the entitlement age - that will depend on the amount of investment income earned over time.

A typical defined benefit plan is a traditional pension plan like the State Retirement System. A typical defined contribution plan is a 401(k).

​I hope this helps explain the difference.