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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.
These employer contributions to these plans typically vest after some period of time, e.g. 5 years of service. These plans may be defined-benefit or defined-contribution pension plans, but the former have been most widely used by public agencies in the U.S. throughout the late twentieth century. Some local governments do not offer defined ...
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 ...
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.
A defined benefit plan is 'defined' in the sense that the benefit formula is defined and known in advance. Conversely, for a "defined contribution retirement saving plan," the formula for computing the employer's and employee's contributions is defined and known in advance, but the benefit to be paid out is not known in advance. [2]
However, defined contribution plans provide more flexibility for employees, who can choose how much to contribute and how to invest their funds. Hybrid plans, such as cash balance and pension equity plans, combine features of both defined benefit and defined contribution plans. These plans have become increasingly popular in the U.S. since the ...