Defined Contribution Plan

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A defined contribution plan is a retirement benefits pension 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 when invested. This type of pension plan is in contrast to a define benefit plan, in which retirement benefits are guaranteed to employees according to a certain formula. In a defined benefit plan, employers are responsible to make 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.