Defined Contribution Plan
Financial term in the Retirement category
Definition
A retirement plan where employees and/or employers contribute to individual accounts, and the retirement benefit depends on contributions and investment performance. Examples include 401(k), 403(b), and 457(b) plans. The employee bears the investment risk.
Related Terms
401(k)
A tax-advantaged retirement savings plan offered by employers that allows employees to contribute a portion of their salary before taxes. Many employers offer matching contributions up to a certain percentage.
Defined Benefit Plan
A retirement plan where the employer guarantees a specific monthly benefit at retirement based on a formula using salary and years of service. Traditional pensions are the most common type. The employer bears the investment risk.
403(b) Plan
A tax-advantaged retirement plan for employees of public schools, nonprofits, and certain religious organizations. Similar to a 401(k) but with different employer eligibility rules. Contributions are made pre-tax and grow tax-deferred until withdrawal.
Frequently Asked Questions
What is Defined Contribution Plan?
A retirement plan where employees and/or employers contribute to individual accounts, and the retirement benefit depends on contributions and investment performance. Examples include 401(k), 403(b), and 457(b) plans. The employee bears the investment risk.
Why is Defined Contribution Plan important in personal finance?
Defined Contribution Plan is an important retirement concept that helps individuals make better financial decisions. Understanding Defined Contribution Plan can improve your financial planning and help you achieve your money goals.
How does Defined Contribution Plan relate to 401(k)?
Defined Contribution Plan and 401(k) are related financial concepts. A tax-advantaged retirement savings plan offered by employers that allows employees to contribute a portion of their salary before taxes. Many employers offer matching contributions up to a certain percentage.
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