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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.
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.
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.
The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the contribution is known but the benefit is unknown (until calculated).
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.
Defined benefit plans and defined contribution plans are two employer-sponsored ways of helping to provide employees with a comfortable retirement. The difference between them lies primarily in ...