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A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. [1] Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employee contributions and, if applicable, employer contributions) plus any investment earnings on the money in the account.
Defined Benefit Plan vs. Defined Contribution Plan. Most are familiar with defined contribution plans like a 401(k). You might be wondering how these accounts differ from a defined benefit plan.
401(k) plan: This defined contribution plan allows employees to contribute a portion of their pre-tax salary to a retirement account. Employers often match a portion of the employee’s contributions.
Defined contribution plans (more common): The employee invests a portion of their paycheck into a retirement account. Sometimes, the employer will match up to a certain amount (e.g. up to 5%).
As far as differences between gratuity and provident funds are concerned, although both types involve lump sum payments at the end of employment, the former operates as a defined benefit plan, while the latter is a defined contribution plan. Specific provident funds include: Employees' Provident Fund Organisation, India's statutory retirement plan
Retirement plans are classified as either defined benefit plans or defined contribution plans, depending on how benefits are determined.. In a defined benefit (or pension) plan, benefits are calculated using a fixed formula that typically factors in final pay and service with an employer, and payments are made from a trust fund specifically dedicated to the plan.