CandleFocus Glossary Editor
A defined contribution plan, often referred to as a DC plan, is a type of retirement plan in which a specified amount of money is contributed by an employer, employee, or both. These contributions are made on a regular basis to an account that is invested in securities such as stocks, bonds, and mutual funds. DC plans differ from pension plans, which are classified as defined benefit plans, in that pension plans are funded by the employer, provide a steady flow of income to the retired worker on a monthly basis, and do not require any employee contributions.
In a DC plan, employees can make their own decisions about how to invest their money, including whether to focus on stocks, bonds, mutual funds, or a combination of the three. They can also decide how aggressive their investment strategy should be. Because their contributions are made with pre-tax dollars, this allows them to save on their current tax bill.
DC plans are popular with both employers and employees. For employers, they provide an easy and low-cost way to encourage their employees to save for retirement and provide an additional benefit that can help attract and retain employees. Employees benefit by being able to save for retirement and have more control over the growth of their retirement fund, in comparison to defined benefit plans, where there is often very little opportunity for employee involvement.
Unlike defined benefit plans, DC plans are subject to investment risks. The value of their investments may go up or down during the time the funds are held in the plan. For this reason, DC plans offer fewer guarantees than defined benefit plans. Additionally, since the account balance is based on contributions, as well as the return on investments, and is subject to market fluctuations, the amount of money held in the account and subsequently available for retirement is not guaranteed.
In spite of this, most DC plans still offer some sort of guarantees in the form of other benefits, such as death or disability benefits, or even a certain percentage of the employee’s income in the event of job loss. In the end, DC plans offer employers and employees an option that allows them to save for retirement while having more control over the return on their investments. However, it is important to remember that these plans also come with associated investment risks. Thus, it is important to plan carefully and be aware of the risks before investing in a DC plan.
In a DC plan, employees can make their own decisions about how to invest their money, including whether to focus on stocks, bonds, mutual funds, or a combination of the three. They can also decide how aggressive their investment strategy should be. Because their contributions are made with pre-tax dollars, this allows them to save on their current tax bill.
DC plans are popular with both employers and employees. For employers, they provide an easy and low-cost way to encourage their employees to save for retirement and provide an additional benefit that can help attract and retain employees. Employees benefit by being able to save for retirement and have more control over the growth of their retirement fund, in comparison to defined benefit plans, where there is often very little opportunity for employee involvement.
Unlike defined benefit plans, DC plans are subject to investment risks. The value of their investments may go up or down during the time the funds are held in the plan. For this reason, DC plans offer fewer guarantees than defined benefit plans. Additionally, since the account balance is based on contributions, as well as the return on investments, and is subject to market fluctuations, the amount of money held in the account and subsequently available for retirement is not guaranteed.
In spite of this, most DC plans still offer some sort of guarantees in the form of other benefits, such as death or disability benefits, or even a certain percentage of the employee’s income in the event of job loss. In the end, DC plans offer employers and employees an option that allows them to save for retirement while having more control over the return on their investments. However, it is important to remember that these plans also come with associated investment risks. Thus, it is important to plan carefully and be aware of the risks before investing in a DC plan.