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.
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