Which statement best describes Defined Contribution Plans?

Defined Contribution Plans are investment accounts established by employers or employees, where the benefits at retirement are based on the contributions made as well as the investment performance of those contributions. This means that both the employee and the employer can contribute funds, and the total retirement benefit is determined by the amount contributed over time and how well those investments perform in the market.

The focus on individual contributions and investment outcomes is a defining feature of these plans. For example, popular forms of defined contribution plans include 401(k) plans and 403(b) plans, where individuals can direct their contributions to various investment options, like stocks, bonds, or mutual funds. The risks and rewards of investment performance directly affect the retirement savings, as opposed to being guaranteed a specific payout, which characterizes defined benefit plans.

Understanding this framework is essential for navigating retirement planning and employee compensation strategies, particularly in an environment where employers encourage employees to take more responsibility for their own retirement savings.