What is the main feature of a Defined Contribution plan?

A Defined Contribution plan primarily allows employees to have individual accounts to which contributions are made. Each employee's benefits in retirement depend on the contributions made to that account and the investment performance of those contributions. Participants typically have a say in how their contributions are invested, and upon retirement, they receive the value that is accumulated in their individual account. This individual account setup distinguishes Defined Contribution plans from Defined Benefit plans, which promise a guaranteed retirement benefit based on a specific formula.

The option that refers to guaranteed benefits is associated with Defined Benefit plans, which promise employees specific payouts based on salary history and years of service, rather than individual accounts. Pooling of contributions generally refers to how funds are managed in Defined Benefit plans and does not describe the individualized approach of Defined Contribution plans. While many Defined Contribution plans often involve fixed contributions from employers, the main defining feature is the existence of individual retirement accounts for employees, making this option the most accurate representation of a Defined Contribution plan.