How are benefits determined in a defined contribution plan?

In a defined contribution plan, benefits are determined based on the accumulated contributions at retirement. This type of retirement plan allows both the employee and the employer to make contributions into an individual account for the employee. The total amount available to the employee upon retirement will depend on how much has been contributed to the account, as well as any investment gains or losses that have occurred over time.

Unlike defined benefit plans, which guarantee a specific payout at retirement based on salary history and years of service, defined contribution plans do not promise a specific amount of benefits. Instead, the retirement benefit is solely based on the sum of contributions and investment performance. This means that the responsibility of saving for retirement and managing those funds falls on the employee, making the total benefits variable and dependent on individual account management.