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
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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).
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
The GASB plans to issue a proposal in July that would revise this requirement, because some IRC section 457 plans have evolved to resemble defined contribution pension plans. Previously, "you didn't see employer contributions in these plans; now, however, you are seeing employers making contributions in some cases," a GASB spokesperson said on June 7.
Ambachtsheer (2004) discussed facilitating workplace pensions by introducing a top optimal pension system that combines the best features of the defined benefit and defined contribution pension plans to, in part, share the risk of lost value and unfunded amounts, along with changes to the pension delivery institutions.
"The only way to do it is to redraft the legislation to allow for defined contribution pension plans, instead of defined benefit plans, which is what we have now."
* Defined contribution pension plans allowing participants to invest in mutual funds
As for small companies adopting the defined contribution pension plans, the government will promote joint fund management by those small companies, and will provide necessary rules and guidelines.
Since 2006, plan sponsors have had the opportunity to add a Roth 401(k) option to defined contribution pension plans. Takeup among plans has been fairly rapid, with half of 401(k) plans offering a Roth option by 2011.
In Defined Contribution Pension Plans: Sticky or Discerning Money?
We try to compare different types of defined contribution pension plans and test their effectiveness under the consideration of costs and risks.
The cap would raise about $9 billion for the federal government over the next 10 years by prohibiting taxpayers from taking advantage of the pre-tax deferral in their 401(k) or defined contribution pension plans after they cross a $3.4 million threshold.
In the case of defined contribution pension plans, the only element fixed in advance is the size of the contribution; the beneficiary would suffer both the risk related to pension fund investments as well as the one related to future inflation.
These structures are often the default option in employersponsored defined contribution pension plans, with more than four out of five employees typically choosing the default, resulting in their investments being switched to low-growth assets too soon.

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