Study guide
10.2 Defined Benefit vs. Defined Contribution
Series 7 General Securities Representative
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1 Introduction
About the Series 7 How to Use This Guide
2 Chapter 1: Equity Securities
1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities
3 Chapter 2: Debt Securities
2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks
4 Chapter 3: U.S. Government & Agency Securities
3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments
5 Chapter 4: Municipal Securities
4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules
6 Chapter 5: Investment Companies
5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation
7 Chapter 6: Variable Products & Annuities
6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance
8 Chapter 7: Alternative Investments & DPPs
7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives
9 Chapter 8: Options
8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements
10 Chapter 9: Customer Accounts
9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts
11 Chapter 10: Retirement & Education Plans
10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation
12 Chapter 11: Securities Markets & Trading
11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants
13 Chapter 12: Rules, Regulations & Ethics
12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct
10.2 Defined Benefit vs. Defined Contribution
Key Takeaways Explain This Topic AI
Defined benefit (pension) plans promise a formula-based benefit and the employer bears all investment risk.
Defined contribution plans specify the contribution, not the payout; the employee bears investment risk.
2026 employee deferral limit for 401(k)/403(b)/457 is $24,500, with an $8,000 catch-up at 50 (or $11,250 at ages 60-63).
The 415(c) total annual additions limit (employee plus employer) is $72,000 for 2026.
457 plans have no 10% early-withdrawal penalty and a separate limit, so a 403(b) and a 457 can both be maxed.
Last updated: June 2026
Two Families of Employer Plans
Every employer-sponsored qualified plan is either defined benefit or defined contribution . The single most tested distinction is who bears the investment risk . Memorize it: in a defined benefit (DB) plan the employer bears the risk; in a defined contribution (DC) plan the employee bears it.
Defined Benefit (Pension) Plans
A defined benefit plan promises a specific retirement benefit, usually computed from salary and years of service. The employer funds the plan actuarially and must contribute whatever is needed to meet the promise, regardless of how the investments perform. These plans are PBGC-insured and reward long tenure but are costly to administer and increasingly rare.
Final-average-pay formula: Annual Benefit = Years of Service x Benefit Percentage x Final Average Salary.
Worked example: 30 years of service x 1.5% (0.015) x $80,000 final average salary = $36,000 per year for life . A career-average formula uses lifetime average pay instead of the final years.
- DB Advantages DB Disadvantages
- Guaranteed lifetime income No individual account; not portable
- Employer bears market risk Complex, expensive administration
- PBGC insurance protection Declining availability in private sector
- Defined Contribution Plans
A defined contribution plan fixes the contribution going in; the ending benefit depends entirely on contributions plus investment results. Each participant has an individual account, so balances are highly portable via rollover, and there is no PBGC coverage because there is no promised payout.
- DC Plan Who uses it
- 401(k) Private for-profit employers; employee deferrals + match
- 403(b) Public schools and 501(c)(3) charities
- 457(b) State/local government and some nonprofits
- Profit-Sharing Employer contributes a discretionary share of profits
- Money Purchase Employer contributes a fixed percentage each year
- ESOP Invests primarily in employer stock
- 2026 Contribution Limits (IRS Notice 2025-67)
- Limit 2026 Amount
- Employee elective deferral (401(k)/403(b)/457) $24,500
- Catch-up, age 50-59 and 64+ +$8,000
- Enhanced catch-up, ages 60-63 (SECURE 2.0) +$11,250
- 415(c) total annual additions (employee + employer) $72,000
- Annual compensation limit for benefit calculations $360,000
So an employee age 55 may defer $24,500 + $8,000 = $32,500 , while an employee age 61 may defer $24,500 + $11,250 = $35,750 . The $72,000 415(c) ceiling caps the combined employer-plus-employee figure (deferrals, match, and forfeitures), but catch-up contributions sit on top of the 415(c) limit.
401(k) Plans in Detail
The 401(k) is the dominant DC plan. Employees elect pre-tax salary deferrals, employers frequently add a match (e.g., 50 cents per dollar on the first 6% of pay), participants choose investments from a plan menu, and many plans permit loans and hardship withdrawals. A Roth 401(k) option accepts after-tax dollars for tax-free qualified growth; both options share the same $24,500 deferral limit.
- Traditional 401(k) Roth 401(k)
- Pre-tax contributions After-tax contributions
- Tax-deferred growth Tax-free qualified growth
- Distributions taxable Qualified distributions tax-free
Under SECURE 2.0, beginning in 2026 catch-up contributions for high earners (prior-year wages over roughly $145,000, indexed) generally must be made on a Roth basis.
403(b) and 457 Plans
403(b) plans (tax-sheltered annuities) serve public-school employees and 501(c)(3) charities and historically held annuities and mutual-fund custodial accounts. A unique feature is the 15-year service catch-up : employees with 15+ years at a qualifying employer may add up to $3,000/year, $15,000 lifetime , separate from the age-50 catch-up.
457(b) plans for state and local government employees have two prized traits: no 10% early-withdrawal penalty before age 59 1/2, and a separate contribution limit. A government employee with both a 403(b) and a 457(b) can therefore defer the full $24,500 to each , totaling $49,000 in 2026 (before catch-ups). 457 plans also offer a special "last 3 years" double-up catch-up before normal retirement age, allowing up to twice the annual limit in those final years to make up for prior under-contribution.
Small-Business and Self-Employed Plans
The Series 7 also tests employer plans built on IRA mechanics for small employers and the self-employed. These are technically defined contribution arrangements but funded into IRAs:
Plan Who uses it 2026 employer/employee features
SEP IRA Self-employed and small firms Employer-only contribution up to 25% of compensation, max $72,000; immediately 100% vested
SIMPLE IRA Employers with <= 100 employees Employee defers up to $17,000 (approx.); employer must match up to 3% or contribute 2% for all
Solo 401(k) Owner-only businesses Owner contributes as both employee ($24,500) and employer (profit-sharing) up to $72,000
A crucial trap: a SEP IRA receives employer contributions only — employees make no salary deferrals — and contributions are immediately vested. A SIMPLE IRA allows employee deferrals plus a mandatory employer match (dollar-for-dollar up to 3% of pay) or a 2% nonelective contribution for every eligible worker. SIMPLE plans also carry a steep 25% early-withdrawal penalty (instead of the usual 10%) for distributions taken within the first two years of participation, a frequently tested detail.
Profit-Sharing and ESOP Mechanics
A profit-sharing plan lets the employer decide each year whether and how much to contribute (it need not actually have profits), allocating contributions among participants under a written formula. A money purchase plan, by contrast, locks the employer into a fixed annual percentage regardless of profitability. An Employee Stock Ownership Plan (ESOP) invests primarily in the employer's own stock, giving employees an ownership stake; participants nearing retirement gain diversification rights so they are not over-concentrated in a single security.
- Feature DB 401(k) 403(b) 457(b)
- Risk bearer Employer Employee Employee Employee
- PBGC insured Yes No No No
- 10% early penalty Possible Yes Yes No
- Portability Limited High High High