How does a Defined Contribution Plan typically function?

A Defined Contribution Plan operates by allowing both employees and employers to contribute a specific amount of money into the plan, typically on a regular basis, such as through payroll deductions. The contributions are invested, and the final benefit received at retirement depends on the amount contributed and the performance of those investments over time.

This structure is designed to enable employees to build their retirement savings actively, while also providing an incentive for employers to contribute to their employees' future financial security. The collaborative effort between employers and employees in funding the plan is a key characteristic that differentiates it from other types of retirement plans, particularly those that guarantee a specific benefit amount at retirement.