A defined contribution pension plan is one in which the employer contributes an amount into each eligible employee’s account within an established plan. The employee decides on the investment strategy for the account and the resulting investment earnings, gains, or losses are recorded in his or her account. When the employee retires, the pension or retirement benefit is based upon his or her account balance. A 401(k) is an example of a defined contribution pension plan.
The defined contribution pension plan eliminates the employer’s uncertainty about its future pension expense and liabilities. It also means simpler accounting. As a result, more companies are choosing defined contribution pension plans over defined benefit pension plans.
