Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What type of retirement plan typically provides a fixed, predetermined benefit at retirement?

1. Defined contribution plan

2. Variation benefit plan

3. Defined benefit plan

4. Self-funded plan

The correct answer is: Defined benefit plan

A defined benefit plan is designed to provide participants with a predetermined, fixed benefit at retirement, typically based on factors such as salary history and years of service. This structure ensures that retirees receive a guaranteed amount, which can be especially beneficial for financial planning and stability in retirement. In contrast, a defined contribution plan allows for variable benefits that depend on the contributions made by both the employer and the employee, along with the investment returns on those contributions. This means the ultimate benefit received in retirement can fluctuate significantly. A variation benefit plan does not refer to a widely recognized retirement plan structure and lacks specificity on predetermined benefits. Finally, a self-funded plan suggests an arrangement where an individual or entity finances its obligations rather than relying on an insurance policy or a formal benefit structure, which does not align with the concept of providing fixed benefits. Thus, the distinct characteristic of a defined benefit plan is its commitment to deliver a set benefit amount, making it the correct answer in the context of retirement planning.