What is the implication of having a retirement plan design that includes defined contributions?

What is the implication of having a retirement plan design that includes defined contributions?

• A. Employer guarantees a specific benefit at retirement
• B. Employee contributions are mandatory but employer contributions are optional
• C. Both employers and employees can contribute to the plan
• D. Only employees contribute to the plan

Answer: (C)

The implication of having a retirement plan design incorporating defined contributions is that both employers and employees can contribute to the plan. In this type of retirement plan, contributions are made to individual accounts, and the amount ultimately available at retirement relies on the contributions made and the investment performance of those contributions. In defined contribution plans, employers often encourage participation by matching employee contributions up to a certain percentage, which can incentivize employees to save more for retirement. This collaborative approach to funding retirement savings helps create a more robust financial future for the employee as both parties pool resources into the retirement savings account. The structure of defined contribution plans means that the final benefit at retirement is not guaranteed by the employer, as it is in defined benefit plans. Instead, the retirement benefit depends on various factors, including the total contributions made and the investment returns earned during the accumulation phase. This distinguishes defined contribution plans from those that offer guaranteed payouts.

The implication of having a retirement plan design incorporating defined contributions is that both employers and employees can contribute to the plan. In this type of retirement plan, contributions are made to individual accounts, and the amount ultimately available at retirement relies on the contributions made and the investment performance of those contributions.

In defined contribution plans, employers often encourage participation by matching employee contributions up to a certain percentage, which can incentivize employees to save more for retirement. This collaborative approach to funding retirement savings helps create a more robust financial future for the employee as both parties pool resources into the retirement savings account.

The structure of defined contribution plans means that the final benefit at retirement is not guaranteed by the employer, as it is in defined benefit plans. Instead, the retirement benefit depends on various factors, including the total contributions made and the investment returns earned during the accumulation phase. This distinguishes defined contribution plans from those that offer guaranteed payouts.