Series 24: Defined Contribution Plans

Defined Contribution Plans

A defined contribution plan is a qualified retirement plan in which the contribution is defined, but the ultimate benefit to be paid out is not. In these kinds of plans, participants contribute a portion of their paycheck to the plan. Participants have their own individual accounts and choose from several different investment options. Often, employers will match all or part of the employee’s contributions. Employer contributions are often on a vesting schedule. Participants’ benefits will depend on the amount of their contributions and the performance of their investments over the participant’s career.

Defined contribution plan benefits are typically paid in a lump sum or in installments, but they may also be paid as an annuity over a person’s lifetime. The most common examples of defined contribution plans are:

• • Profit-sharing plans. A plan for corporate employees where benefits are linked to corporate profits through a pre-determined formula. Distributions are not guaranteed, but when there is a distribution, it is made equally to all employees as a percentage of their salary.
• • 401(k) plans. A