Defined-Contribution Plan

Loading the player...

What is a 'Defined-Contribution Plan'

A defined-contribution plan is a retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of each of its employees. The defined-contribution plan places restrictions that control when and how each employee can withdraw these funds without penalties.

BREAKING DOWN 'Defined-Contribution Plan'

There is no way to know how much the plan will ultimately give the employee upon retiring. The amount contributed is fixed, but the benefit is not.

Defined-contribution plans account for $6.7 trillion of the $24 trillion in total retirement plan assets held in the United States as of Dec. 31, 2015. The most popular defined-contribution plan option is the 401(k), accounting for more than two-thirds of the defined-contribution plan total. More than 87% of eligible employees at corporations participate in their company 401(k) plan. The defined-contribution plan could be considered the opposite of the defined-benefit plan, which has participants receiving a guaranteed benefit at a specific future date.

Advantages of Participating

Contributions made to defined-contribution plan may be tax-deferred. In traditional defined-contribution plans, contributions are tax-deferred, but withdrawals are taxable. In the Roth 401(k), contributions are taxable, but withdrawals are tax-free if certain qualifications are met. The tax-advantaged status of defined-contribution plans generally allow balances to grow larger over time compared to taxable accounts.

Defined-contribution plans offered through employers may also receive matching contributions. More than three-fourths of companies contribute to employee 401(k) accounts based on the amount the participant contributes. The most common employer matching contribution is 50 cents per $1 contributed up to a specified percentage, while several contribute $1 for every $1 contributed.

Other features of many defined-contribution plans include automatic participant enrollment, automatic contribution increases, hardship withdrawals, loan provisions, and catch-up contributions for employees age 50 and older.

Other Defined-Contribution Plan Examples

The 401(k) is perhaps most synonymous with the defined-contribution plan, but there are many other plan options. The 401(k) plan is available to employees of public corporations and businesses. The 403(b) plan is typically available to employees of nonprofit corporations, such as schools. 457 plans are available to employees of certain types of nonprofit businesses as well as state and municipal employees. The Thrift Savings Plan (TSP) is used for federal government employees. As of Dec. 31, 2015, roughly $2 trillion in assets were held in non-401(k) account types.

Since the individual retirement account (IRA) often entails defined contributions into a tax-advantaged account with no concrete benefit, it could also be considered a defined-contribution plan.

RELATED TERMS
  1. Corporate Pension Plan

    A formal arrangement between a company and its employees - or ...
  2. Thrift Savings Plan - TSP

    A retirement savings plan created by the Federal Employee's Retirement ...
  3. Pension Plan

    A type of retirement plan, usually tax exempt, wherein an employer ...
  4. Annual Addition

    The total dollar amount contributed in a given year to a participant's ...
  5. Employee Contribution Plan

    A company-sponsored retirement plan where employees may elect ...
  6. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
Related Articles
  1. Retirement

    The Basics Of A 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Find out why.
  2. Retirement

    What's a Defined Contribution Plan?

    A defined contribution plan is a company retirement plan that specifies the amount of money contributed to it.
  3. Retirement

    Save Safely With The DB(k) Retirement Plan

    Your retirement savings can have the best of the defined-benefit plan and the defined-contribution plan with this hybrid.
  4. Retirement

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  5. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  6. Financial Advisor

    The 4-1-1 on 403(b) Plans

    These plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
  7. Financial Advisor

    SEP vs. Keogh Plans: Which is Right for You?

    SEP and Keogh plans each have their pros and cons. Here's how to choose which one is right for you.
  8. Retirement

    The 401(k) and Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  9. Retirement

    Deferred Compensation Plans for Nonprofits

    Learn about the two types of deferred compensation plans that nonprofit companies can use to allow high-ranking employees to increase their retirement savings.
  10. Retirement

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
RELATED FAQS
  1. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ... Read Answer >>
  2. What is the difference between a 401(k) plan and a 457 plan?

    Discover how 401(k) plans are privately offered employee retirement plans, while 457 plans are typically available to public ... Read Answer >>
  3. Who is eligible for a Teacher Retirement?

    Learn about the retirement option, the Teacher Retirement System, offered to teachers and other public school employees, ... Read Answer >>
  4. Who bears the investment risk in 401(k) plans?

    Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad ... Read Answer >>
  5. How can an entrepreneur save for retirement?

    Learn about the retirement savings plan options for entrepreneurs and small business owners, including administration and ... Read Answer >>
  6. What's the difference between a 401(k) and a pension plan?

    Discern the differences between 401(k) plans, in which employees assume the market risk, and pension plans, in which the ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center