What is the primary purpose of a defined benefit formula?

The primary purpose of a defined benefit formula is to calculate the retirement benefit for employees covered under a defined benefit (DB) plan. This formula typically incorporates factors such as an employee's salary history, years of service, and sometimes an age multiplier to determine the amount the employee will receive upon retirement. The focus of a defined benefit plan is to provide predictable retirement income to participants, ensuring they have a steady cash flow in their retirement years based on the parameters defined in the plan.

While the other options touch on important aspects of retirement plans, they do not specifically align with the core function of a defined benefit formula. For example, determining employee eligibility involves criteria that may or may not relate directly to the benefit calculation itself. Similarly, establishing contribution rates and defining plan sponsor obligations are crucial for the administration and funding of the plan, but they are secondary to the fundamental role of calculating the actual benefits that retirees will receive.