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Defined Contribution Plan

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A defined contribution plan is a retirement benefits plan that serves as a deferred compensation retirement savings account such as a 401(k) or 403(b), in which retired employees have no guaranteed benefits. In such a plan employee and employer contributions are generally kept in an individual account controlled by the employee. Retirement benefits depend on contributions from the employee and the employer made to that individual account and on how well these contributions perform while invested. This type of pension plan is in contrast to a defined benefit plan, in which retirement benefits are guaranteed to employees according to a certain formula. In a defined benefit plan, employers are responsible for making up the difference if investments fall short of the costs of the guaranteed retirement benefits. A defined contribution plan is much less risky for employers, because a defined contribution plan does not hold the employer responsible for providing guaranteed benefits.

Background

In defined contribution plans, both employer and employee contribute to the employee's account. Then, the employee determines how the contributions are invested, usually selecting from options presented by the plan administrator. At retirement, the amount of money in the fund is the basis of the employee's retirement benefit. The sponsoring public entity does not ensure a particular benefit amount, and usually does not provide post-retirement cost of living increases.[1]

In 2009, Michigan, Nebraska, and Alaska had mandatory defined contribution plans for general state employees, and Alaska was the only state to have a mandatory defined contribution plan for teachers.[1]In 2012, Michigan added an optional defined contribution plan for public school employees.[2]

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