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 ?
Transition to defined-contribution pensions: Private- and public-sector employers are moving from traditional defined-benefit pension arrangements to defined-contribution pension plans, thereby shifting financial risks from employers to workers.
Defined-contribution pension plans are essentially group RRSPs and are subject to the volatility of the stock market.
The private-sector panel members also called for a reform of defined-contribution pension plans modeled on U.S.
Second, although there is a theoretical case for the shift toward defined-contribution pension plans contributing to later retirement--it is rarely costly to defer retirement under such a plan--the trend toward them and away from defined-benefit plans started at least 5 years before the changes in participation rate trends.
If defined-contribution pension plans are introduced, they should promote an increase in the total value of equity holdings in China as well as big changes in the domestic securities business.
AICPA Statement of Position 94-4, Reporting of Investment Contracts Held by Health and Welfare Benefit Plans and Defined-Contribution Pension Plans, indicates that a fully benefit-responsive investment contract should be reported at contract value and provides an example of a fully benefit-responsive synthetic GIC as an investment contract that is subject to SOP 94-4.
"That's where an annuity can be of benefit to people...And we're seeing a lot of change from defined-benefit to defined-contribution pension plans."
It simplifies the disclosures plans must make for certain investments and also supersedes AICPA Practice Bulletin 12, Reporting Separate Investment Fund Option Information of Defined-Contribution Pension Plans.
Among other deals covered by the agreement, Tokai Tokyo's financing service and Mitsui Sumitomo's knowledge of risk management and 401(k)-style defined-contribution pension plans will be combined to provide financial support programs for small and midsize companies.
Even as more companies offer defined-contribution pension plans, nearly a third of the Fortune 100 companies now offer employees so-called "hybrid" plans, an increase from 22 hybrids for the same group in 1998, according to a study by consulting firm Watson Wyatt Worldwide, Bethesda, Md.
The most frequent example is investment contracts held by defined-contribution pension or welfare benefit plans that are carried at contract value as required by SOP 94-4, Reporting of Investment Contracts Held by Health and Welfare Benefit Plans and Defined-Contribution Pension Plans. The disclosure amounts relating to such contracts typically are calculated by employing a discounted cash flow approach based on prevailing interest rates for similar instruments.
Calls for an increase in the amount of such tax-deductible contributions were voiced at a meeting the ministry held with officials at companies that have introduced defined-contribution pension plans, the officials said.