Defined Contribution Plans

What are Defined Contribution Plans?

Defined contribution plans are pension plans in which the contributions are fixed (defined) and the benefits vary depending on the investment performance of the pot of money built up by the contributions.

This is in contrast to a defined benefits plan where the benefits are fixed and the contributions are made in order to secure those benefits.

Both employers and employees can pay into defined contribution plans. The monies paid in serve to build up a fund that can be used to provide an income on retirement, usually by means of an annuity.

Defined contribution pension plans are becoming more popular with employers due to the ever increasing cost of defined benefits plans. With defined contribution plans, the employee takes all the risk if the plan does not perform, the employers liability is limited to the fixed contributions.

For further information see the Wikipedia defined contribution plans definition.

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