A retirement plan that uses a specific predetermined formula to calculate the amount of an employee’s future benefit. The most common type of formula is based on the employee’s terminal earnings. Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a worker’s career—for example, the highest 5 out of the last 10 years—multiplied by the maximum number of years of credited service under the plan. In recent years, a new type of defined benefit plan, a cash balance plan, has become more prevalent. Under this type of plan, benefits are computed as a percentage of each employee’s account balance. Employers specify a contribution—usually based on a percentage of the employee’s earnings—and a rate of interest on that contribution that will provide a predetermined amount at retirement, usually in the form of a lump sum. In the private sector, defined benefit plans are typically funded exclusively by employer contributions. In the public sector, defined benefit plans often require employee contributions.