Defined Contribution Plan
What Is a Defined Contribution Plan?
A defined contribution plan is a retirement savings plan in which employees, employers, or both contribute money to an individual retirement account. The final retirement balance depends on contributions and investment performance.
Common examples include 401(k) plans, 403(b) plans, and individual retirement accounts.
Why It Matters
Defined contribution plans allow workers to build retirement savings through regular contributions and investment growth. Unlike defined benefit plans, the retirement outcome depends on how much is contributed and how the investments perform.
These plans are now one of the most common retirement savings systems in many workplaces.
How a Defined Contribution Plan Works
Participants contribute a portion of their income to the retirement account.
Typical features include:
- employee salary contributions
- employer matching contributions in some plans
- investment options such as funds or portfolios
- tax advantages for retirement savings
The account balance grows based on contributions and investment returns.
Defined Contribution Plan vs Defined Benefit Plan
- A defined contribution plan depends on contributions and investment results.
- A defined benefit plan guarantees a predetermined retirement payment.
FAQs About Defined Contribution Plans
Who controls the investments?
Employees usually select investments from available options.
Are employer contributions required?
Employer contributions depend on the specific plan.
What determines retirement income?
Income depends on the account balance and withdrawal strategy.
Related Terms
