"Defined Benefit Plans" earned their name because they define a specific benefit that will be paid to the employee on a monthly basis at retirement. The amount of the benefit, usually based on factors such as age, earnings, and years of service, is known in advance. Almost all early retirement plans were defined benefit plans - often called "Pension Plans." The first one was established by the American Express Company in 1875, which was soon followed by utilities, banking and manufacturing companies.

These early plans had little or no protection for the employees' benefits when a company had financial trouble or went out of business, which prompted Congress to enact the Employee Retirement Income Security Act (ERISA) in 1974. ERISA set strict requirements for private pension plans. These included placing the Department of Labor (DOL) in charge of ensuring that pension plans are properly operated and that their assets are managed in a prudent manner, while the Internal Revenue Service (IRS) oversees pension plan funding and vesting requirements, and also making sure they are in compliance with tax laws. In addition to the oversight from the IRS and DOL, ERISA also established the Pension Benefit Guaranty Corporation (PBGC), which insures pensions of workers that are covered by private defined benefit plans.

The biggest advantage for employees in a defined benefit plan is that the Employer is responsible for providing the benefits at retirement - not the employee. The employees' benefit is not dependant on how much, if any, they can afford to save; nor do they have to worry about fluctuations of the stock or bond markets. They also have the advantage of knowing in advance what their retirement benefit will be. For example, depending on how the plan is written, it can be a specified dollar amount (i.e., $500 per month at retirement), a percentage of the employees pay (i.e., 1% of final pay times years of service), or based on a specific dollar amount for years of service (i.e., $50 per month at retirement for every year of service).

For employers, the advantages are in the benefits they provide employees. These will generally build loyalty to the company (which helps retain quality employees) and boost employee moral. Plans can be structured to help meet corporate workplace goals, such as offering enhanced early retirement benefits. They can also gain favorable interest rates and lower fees on invested funds by "pooling" the assets in the plan. Favorable returns may lead to a reduction or even elimination of an employer's contributions and/or an increase to employees' benefits at a reduced or nominal cost.

While the fact that employers are responsible for investment returns is a huge benefit for employees, it is also a large liability for the employer. In years of poor market performance or bad investment returns, the company is responsible for ensuring that there is enough money available to cover the promises made to employees at retirement. Additionally, if the plan does not have enough money to provide for the benefits promised to employees, or becomes "under funded," they cannot terminate the plan until it is once again "fully funded."

Unlike Defined Benefit Plans wherein a benefit at retirement is specifically promised providing the employee meets eligibility and time in service criteria, a Defined Contribution Plan outlines the contributions that can be made into the plan either by the employee, the employer or both. The participants in the plan can then decide to what extent (up to the maximum allowed) they want to participate and only contribute the funds to that amount. Participation is voluntary, though if an employer chooses to contribute they will have to contribute to all eligible employees according to the allocation as outlined in their plan document.

Defined Contribution Plans are a benefit to employers because, unlike Defined Benefit Plans, participants bear the investment risk. Investment selection is most commonly left to the plan participant, though many plans can allow for the investment choices to be made by the employer or a “committee” (this practice is generally not recommended as it significantly increases the fiduciary risk for the plan sponsor). But since the company is not responsible for providing the benefit at retirement, it makes no difference to the employer if a participant makes large returns on investments available in the plan or loses money in their portfolio due to fluctuations in the market or general economic conditions.

Contribution limits are governed by the IRS as put into law by the legislature and are regularly adjusted for items such as cost of living increases, higher contributions, and “catch-up” provisions for older employees. Contributions are generally based on a percentage of the amount of total earned income.

Employees also have several key advantages with a Defined Contribution Plan. There are tax advantages on voluntary contributions made to the plan, they have more control over investment choices, and any money they contribute to the plan is “vested.” There is more portability of assets when changing jobs, more choices of use of funds at retirement, and, if death should occur, funds pass to beneficiaries.