In a defined contribution plan, a plan participant's retirement income is dependent on the value of accumulated contributions at retirement. The plan defines the contribution amount, not the retirement income benefit. Until then, projected benefits are just that — projections. With defined contribution plans, it is impossible to determine with certainty what the retirement income will be.
Defined contribution plans are especially attractive to employers wanting the ability to predict plan costs, due to the fact that the plan clearly outlines the employer's contribution commitment. They are popular with employees because each employee can track and manage their accounts, not to mention they offer portability.
There is a wide array of defined contribution plan types. From the widely popular 401(k) plan, to the traditional profit sharing plan, these plans resonate well with employees and employers. More in-depth attention to each type is presented in upcoming sections.
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