Which statement about a traditional defined benefit pension plan is incorrect?

Which statement about a traditional defined benefit pension plan is incorrect?

• A. It maximizes benefits for older employees.
• B. Contributions depend on the company's profitability.
• C. It rewards employees based on length of service.
• D. It is funded through a unit benefit formula.

Answer: (B)

A traditional defined benefit pension plan is designed to provide employees with retirement income based on a formula that typically considers factors such as salary history and length of service. The benefits under this type of plan are predetermined and not directly tied to the company's profitability. Instead, the employer is responsible for funding the plan, and they must ensure there are sufficient assets to meet the future obligations to retirees, regardless of the company's financial performance. Option B is incorrect because contributions to a traditional defined benefit plan are not dependent on the company's profitability in a direct manner. The employer makes contributions based on actuarial valuations and the plan's funding requirements, rather than fluctuating with profit levels. This ensures the plan remains adequately funded to pay out the promised benefits. The other options reflect characteristics of defined benefit plans accurately. They maximize benefits for older employees due to factors like salary progression over time, reward employees based on length of service reflecting the idea that the longer an employee works for the company, the greater their retirement benefit, and they can be structured using a unit benefit formula that calculates benefits based on years of service and average salary.

A traditional defined benefit pension plan is designed to provide employees with retirement income based on a formula that typically considers factors such as salary history and length of service. The benefits under this type of plan are predetermined and not directly tied to the company's profitability. Instead, the employer is responsible for funding the plan, and they must ensure there are sufficient assets to meet the future obligations to retirees, regardless of the company's financial performance.

Option B is incorrect because contributions to a traditional defined benefit plan are not dependent on the company's profitability in a direct manner. The employer makes contributions based on actuarial valuations and the plan's funding requirements, rather than fluctuating with profit levels. This ensures the plan remains adequately funded to pay out the promised benefits.

The other options reflect characteristics of defined benefit plans accurately. They maximize benefits for older employees due to factors like salary progression over time, reward employees based on length of service reflecting the idea that the longer an employee works for the company, the greater their retirement benefit, and they can be structured using a unit benefit formula that calculates benefits based on years of service and average salary.