What is a defined contribution plan?

A defined contribution plan is indeed a savings plan where a set amount is contributed to an investment account. In this type of plan, both employers and employees can contribute, typically on a pre-tax basis, into individual accounts for employees. The total amount of retirement benefits ultimately depends on the contributions made and the performance of the investments chosen within the account. This means that the eventual payout during retirement can fluctuate based on various factors, such as market conditions and investment choices, highlighting one of the principal differences from defined benefit plans, which promise a specific payout at retirement.

This understanding also clarifies why the other options do not fit the description of a defined contribution plan. A defined contribution plan does not guarantee a fixed payout; that characteristic belongs to defined benefit plans. It requires contributions from employees or employers, making any claim of no employee contributions inaccurate. Finally, a pension plan that is solely employer-funded implies a different structure altogether, which is more akin to defined benefit plans rather than defined contribution plans.