In a defined benefit plan, investment risk is generally on the employer. The Internal Revenue Code and ERISA both impose minimum funding requirements on the employer with respect to defined benefit plans to help ensure that plan assets are sufficient to provide promised benefits. If the plan suffers investment losses, then the employer may be required to increase plan contributions. In addition, benefits under defined benefit plans are guaranteed (within limits) by the Pension Benefit Guaranty Corporation. In the event a plan terminates with assets insufficient to pay promised benefits, the Pension Benefit Guaranty Corporation will pay benefits up to the maximum guaranteed amount. For 2002, the maximum guaranteed benefit for an individual retiring at age 65 is $3,579.55 per month, or $42,954.60 per year.

In a defined contribution plan, the benefit the participant is entitled to is the account balance. Thus, the plan participant bears the risk of investment losses, regardless of whether investment decisions are made by the participant or a plan fiduciary. Defined contribution plans are not guaranteed by the Pension Benefit Guaranty Corporation.