What does a defined contribution plan entail?

A defined contribution plan is a type of retirement plan that establishes a separate account for each participant. This means that the contributions made by both the employer and the employee are kept in distinct accounts, allowing individuals to track their own funds and see how their investments grow over time. The total retirement income a participant ultimately receives depends on several factors, including the amount contributed to the account, the performance of the investments, and the timing of withdrawals.

In this plan, contributions can vary from year to year, and the eventual payout is not predetermined based on salary or other factors. Therefore, the benefits are not non-determinable; rather, they are directly tied to the contributions and investment returns. Additionally, defined contribution plans are not exclusive to corporate employees, as they can also be offered by nonprofits and government entities, making the scope of availability broader than just corporate employment. Finally, they do not guarantee a fixed payout at retirement; instead, the benefits depend on the account's balance at the time of retirement.