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A defined contribution pension plan is an individual
account plan. Annual contributions to a participant’s
account are based on the formula contained in the plan.
These are generally a mix of employer and employee
pre-tax contributions. Retirement benefits are based
on the value of the accumulation in the account. Employees
direct where the money in the account is to be invested
and thereby bear the investment risk. Investment performance
directly affects the value of retirement benefits.
The employer’s commitment is to make annual contributions,
not to provide a level of benefits. The Pension Benefit
Guaranty Corporation (PBGC) does not guarantee benefits
for these plans. Examples of Defined Contribution plans
include: 401(k), Profit-Sharing Plan, and Employee
Stock Ownership Plans (ESOP).
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