From an employer's standpoint, the defined benefit plan's major advantage is promotion of low employee turnover. The economic consequences of job-changing are not desirable under a defined benefit plan, since benefits are frozen at the time of separation, instead of adjusted for inflation over time. Thus, defined benefit plans provide incentive to stay with the firm for a long period.

However, there are several disadvantages associated with defined benefit plans. First, the plan puts greater risk on employers, since it guarantees to pay employees a fixed retirement benefit regardless of the firm's ability to fully fund the plan. Second, the employer's future cash contributions to the plan are uncertain, thus hampering financial planning efforts. This is particularly true if retirement benefits are based on final years' salaries, which can grow at different rates than inflation and other assumed levels. Finally, because of FASB Statement 87 , there are greater financial reporting requirements associated with defined benefit plans.

Defined contribution plans avoid many of the problems of defined benefit plans, since future payments are based on the rate of return on the pension plan's portfolio. Furthermore, since employee retirement benefits are not fixed, defined contribution plans are exempt from the reporting requirement of FASB Statement 87 . However, since retirement benefits are based on the portfolio's return, the defined contribution plan provides no strong incentives for employees to remain with the firm, as do defined benefit plans.

The greater risks involved with a defined benefit plan are a major reason why, in general, only large corporations, such as IBM and GM, can afford to offer them to employees.