What distinguishes a Defined Contribution Plan?

A Defined Contribution Plan is characterized by the fact that the employer makes contributions to a retirement account on behalf of the employee. This means that the amount the employee ultimately has at retirement is based on the contributions made and the performance of the investments within the account. In this type of plan, there is no guarantee of a specific pension amount at retirement, which differentiates it from Defined Benefit Plans that promise a predetermined payout.

In a Defined Contribution Plan, the actual retirement benefits depend on the contributions over time and the investment returns, rather than a fixed amount promised by the employer. This aspect is crucial because it places the investment risk on the employee, as the final amount can vary significantly based on market performance.

The other options describe features that do not accurately reflect the nature of a Defined Contribution Plan. For example, while employees may contribute, it is not a requirement for qualifying; instead, the employer’s contributions are what primarily define the plan. Additionally, while employees are typically involved in their own account management, the plan itself is not established solely by employees but rather by both employers and employees, reflecting a joint partnership in retirement savings.