Defined Contribution Plan

In Detail

In a defined contribution (DC) plan, the employer's obligation ends with making contributions — there is no guaranteed benefit amount at retirement. The most common example is the 401(k) plan, but DC plans also include 403(b) plans for nonprofits and educational institutions, 457 plans for government workers, and profit-sharing plans. The employee typically chooses from a menu of investment options and bears all the investment risk. The final retirement income depends entirely on how much was contributed and how investments performed over the accumulation period.

DC plans have largely replaced defined benefit pensions in the private sector because they shift financial risk from employer to employee, are portable when workers change jobs, and have more predictable costs for employers. However, critics note that DC plans transfer longevity risk to individuals, most workers undersave, and investment fees can significantly erode returns over decades. The average 401(k) balance for workers aged 55-64 is approximately $210,000, which would generate only about $12,000 per year in retirement income.