Defined contribution plans specify what goes into the account rather than what comes out at retirement. The 401(k) is the most common US example. Employees and often employers contribute, then employees direct investments. Final benefits depend on contributions and investment returns.
Common Plan Types
US defined contribution plans include 401(k) for private employers, 403(b) for nonprofits and education, 457 for government, and various IRAs. Other countries have similar structures with different names and rules. Contribution limits, tax treatment, and employer matching vary by plan type.
Employer Matching
Many employers match employee contributions up to certain limits. Common formulas include 50% match up to 6% of salary or dollar-for-dollar up to 3%. Matching is a valuable benefit, essentially free money for employees who contribute enough to receive full matches.
Investment Responsibility
Employees typically choose investments from options the employer selects. This shifts investment risk from employer to employee. Good plans offer appropriate investment choices and education. Target-date funds that adjust allocation over time have become popular defaults.