UK Accounting Glossary
A defined contribution plan is a type of qualified retirement plan, meaning it receives favourable tax treatment. A defined contribution plan requires the employer, on behalf of the employee, to make a specified, fixed contribution to the plan. The total dollar contribution made to the defined contribution plan is based on a percentage of the employee’s compensation. The money is invested by the employee according to the options offered by the defined contribution plan. Unlike a conventional defined benefit plan, the benefits of a defined contribution plan are not fixed or predetermined. At retirement, the employee’s benefit depends on the performance of the investment account and the amounts contributed to the defined contribution plan. A 401(k) plan is one type of defined contribution plan. One advantage of a defined contribution plan is that, for employees who change jobs, it is often possible to take the accumulated retirement assets with them.
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This glossary post was last updated: 7th February 2020.