What best describes a Defined Contribution Plan?

What best describes a Defined Contribution Plan?

• A. A government pension program.
• B. A retirement plan where the employer guarantees a fixed payout.
• C. A retirement plan like a 401(k) where both employees and employers contribute to a fund controlled by the employee.
• D. A plan that provides a guaranteed minimum benefit.

Answer: (C)

Defined contribution plans focus on the contributions rather than a promised retirement payout. The retirement balance is built in an individual account, and the eventual benefit depends on investment returns rather than a guaranteed fixed amount. In this setup, the employee usually has control over how the funds are invested, and the employer may also contribute, often through matching. An example you’ll see is a plan like a 401(k), where both employee and employer contribute to an account that the employee controls and directs. Because the benefit is tied to investment performance, there is no guaranteed minimum payout. By contrast, government pension programs typically promise a fixed benefit, and plans that guarantee a minimum benefit align with defined benefit structures.

Defined contribution plans focus on the contributions rather than a promised retirement payout. The retirement balance is built in an individual account, and the eventual benefit depends on investment returns rather than a guaranteed fixed amount. In this setup, the employee usually has control over how the funds are invested, and the employer may also contribute, often through matching. An example you’ll see is a plan like a 401(k), where both employee and employer contribute to an account that the employee controls and directs. Because the benefit is tied to investment performance, there is no guaranteed minimum payout. By contrast, government pension programs typically promise a fixed benefit, and plans that guarantee a minimum benefit align with defined benefit structures.