Defined Contribution (DC) Plan

A defined contribution plan, on the other hand, does not promise you a specific benefit amount at retirement. Instead, you and/or your employer contribute money to your individual account in the plan. In many cases, you are responsible for choosing how these contributions are invested, and deciding how much to contribute from your paycheck through pretax deductions. Your employer may add to your account, in some cases by matching a certain percentage of your contributions. The value of your account depends on how much is contributed and how well the investments perform. At retirement, you receive the balance in your account, reflecting the contributions, investment gains or losses, and any fees charged against your account. The 401(k) plan is a popular type of defined contribution plan, and there are three types of 401(k) plans:

  1. Traditional
  2. SIMPLE 401(k)
  3. Safe Harbor 401(k)

plans. The SIMPLE-IRA plan, SEP, employee stock ownership plan (ESOP), and profit-sharing plan are other examples of defined contribution plans.

Note

  1. Employers can choose whether to offer a retirement plan to employees; Federal law does not require employers to offer or to continue to offer a plan.