Defined Contribution Plan

Business, Legal & Accounting Glossary

Definition: Defined Contribution Plan




What is the dictionary definition of Defined Contribution Plan?

Dictionary Definition


A type of pension plan that does not guarantee any particular pension amount upon retirement. Instead, the employer pays into the pension fund a certain amount every month, or every year, for each employee. The employer usually pays a fixed percentage of an employee’s wages or salary, although sometimes the amount is a fraction of the company’s profits, with the size of each employee’s pension share depending on the amount of wage or salary. Upon retirement, each employee’s pension is determined by how much was contributed to the fund on behalf of that employee over the years, plus whatever earnings that money has accumulated as part of the investments of the entire pension fund.


Full Definition of Defined Contribution Plan


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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Defined Contribution Plan. PayrollHeaven.com. Retrieved September 16, 2021, from PayrollHeaven.com website: https://payrollheaven.com/define/defined-contribution-plan/

Definition Sources


Definitions for Defined Contribution Plan are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 22nd April, 2020 | 2 Views.