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 ?
And defined contribution plans were much easier for employees to understand (and appreciate) than defined benefit plans.
This year, the strong financial markets have boosted the value of pension plan assets to levels that make it much more advantageous to complete a full or partial conversion to a defined contribution plan.
This article summarizes the advantages and disadvantages of defined benefit and defined contribution plans for public-sector employers and discusses some defined contribution options that can stand alongside an existing defined benefit arrangement.
Among middle-sized organizations one of the most popular defined contribution plans is the 401(k) plan.
Moving to a discussion of the effect of pensions on retirement age, they argue that any change will further advantage defined contribution plans.
The above increases have drawn much attention to the fact that employees can now reach the maximum contribution level through a defined contribution plan, so that any existing money-purchase pension plan (MPPP) could be terminated in 2002 without sacrificing contribution levels.
On September 11, 1998, Tax Executives Institute submitted the following comments to the Internal Revenue Service on Notice 98-28, relating to optional forms of benefits under defined contribution plans.
Oakland County chose the ICMA Retirement Corporation (RC), a Washington, DC based specialist in public sector retirement administration, as the sole provider for its new defined contribution plan.
Under a defined contribution plan, participants or the company puts money in, and participants walk away with whatever value accrues, whether it goes up or down.
The maximum amount of compensation an employee can defer in a defined contribution plan such as a 401(k) plan is the lesser of a set percentage of salary or a statutory cap.