Defined contribution plan

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Defined contribution plan

A pension plan whose sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: Defined benefit plan

Defined Contribution Plan

A retirement plan in which the employee and/or employer contribute a set dollar amount each month. The benefits of a defined contribution plan are not set, and depend upon how well the contributions are invested before the pensioner starts to make withdrawals. The disadvantage of a defined contribution plan is the possibility that the investments will not perform as well as expected, giving the pensioner a less secure retirement. The advantage is that the pensioner, while still making contributions, has the ability to determine how the contributions are invested, at least to a certain extent. See also: 401(k).

Defined contribution plan.

In a defined contribution retirement plan, the benefits -- that is, what you can expect to accumulate and ultimately withdraw from the plan -- are not predetermined, as they are with a defined benefit plan.

Instead, the retirement income you receive will depend on how much is contributed to the plan, how it is invested, and what the return on the investment is.

One advantage of defined contribution plans, such as 401(k)s, 403(b)s, 457s, and profit-sharing plans, is that you often have some control over how your retirement dollars are invested. Your choice may include stock or bond mutual funds, annuities, guaranteed investment contracts (GICs), company stock, cash equivalents, or a combination of these choices.

An added benefit is that, if you switch jobs, you can take your accumulated retirement assets with you, either rolling them into an IRA or a new employer's plan if the plan accepts transfers.

References in periodicals archive ?
Ron Snell, a pension expert with the National Conference of State Legislators, said several states, including Ohio, South Carolina and Florida, have started offering defined-contribution plans in the last few years, but it is too soon to evaluate their effectiveness.
Early tests show defined-contribution plans can work: For example, use of generic drugs rose from 20% to 90% for one Florida employer that switched to such a plan.
The Health and Welfare Ministry is considering allowing companies to adopt, as early as fiscal 2001, hybrid pension programs combining features of both defined-benefit and defined-contribution plans, a business daily said Tuesday.
This biennial study provides baseline data on the key elements of the defined-benefit and defined-contribution plans of FEI Canada members, as well as how plan sponsors are dealing with significant legislative and market changes.
Provider of Employers' Defined-Contribution Plans to Implement Pivotal CRM to Optimize Operational Efficiency, Improve Information Access and Analysis, Promote Better Employee Collaboration and Enhance Customer Service
2002-21 (29) effectively required professional employer organizations (PEOs) that maintain defined-contribution plans for the benefit of their clients' employees either to terminate the plans or convert them into multiple employer plans.
Increasing use and acceptance of the Internet will accelerate the move toward defined-contribution plans, said Peter Biggins of Hewitt Associates, Rowayton, Conn.
and the 1997-98 chairman, is that Congress should preserve employer flexibility in designing defined-benefit and defined-contribution plans and avoid legislating mandates that stifle an important source of national savings and retirement security.
Under current law, a company cannot have more than 10 percent of its defined-benefit plan, like a traditional pension plan, invested in company stock, but there is no such restriction on 401(k)s and other defined-contribution plans.
In particular, the AICPA opposes the elimination of cross-testing, in which a complex set of rules to test for discrimination in defined-benefit plans also are used for defined-contribution plans.
In fact, several major employers, including Medtronic and Motorola, have already started offering defined-contribution plans as a health benefit option.