Defined
Contribution Plans
Download/view PDFDefined contribution plans are plans in which the annual contribution is generally allocated to participants based on each participant's percentage of compensation. The allocation may be the same percentage of pay for everyone or may vary by age or compensation level (within certain limits). Each participant's account shares pro-rata in the earnings of the plan's investments. At retirement (or termination of employment) the participant is entitled to the balance in his or her account (subject to the vesting schedule.) There are various types of defined contribution plans; profit sharing, 401(k) profit sharing plans, money purchase, and target benefit are the most common.
Good investment returns benefit the plan participants; poor investment returns are also passed on to the participants. The investment return has no bearing on the amount of the required contribution to the plan. However, the trustee is responsible for investing the plan's money in a prudent manner or for making a prudent selection of investment options into which participants direct their own investments.