What is a defined contribution retirement plan and how do I know if mine is?

According to the US Department of Labor, the Employee Retirement Income Security Act (ERISA) covers two types of retirement plans: defined benefit plans and defined contribution plans.

A defined benefit plan promises a specific monthly benefit upon retirement. The plan may set this promised benefit as an exact dollar amount, such as $100 per month at retirement, or calculate it based on various factors, such as salary. How is it different from the defined contribution retirement plan?

What is a defined contribution retirement plan and how do I know if mine is?

On the other hand, the defined contribution plan does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a fixed rate, such as 5 percent of annual earnings.

At retirement, the employee will receive their account balance, which is based on contributions plus or minus investment gains or losses. Account value will fluctuate due to changes in the value of investments.

It's important to note that there is no way of knowing how much a defined contribution plan will give an employee at retirement, as contribution levels can change and investment returns can go up and down over the years.

Major examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit sharing plans, so if you have one of these, you are in a defined contribution retirement plan.

Defined contribution plans accounted for $11 trillion of the $39.4 trillion in total retirement plan assets in the United States as of December 31, 2021, according to the Investment Company Institute (ICI).

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