Which description applies to a defined contribution retirement plan?

• A. Based on a fixed formula
• B. Employee and employer contribute a specific amount into the plan for each participant
• C. Benefits guaranteed by government
• D. Not subject to any limits

Answer: (B)

In a defined contribution plan, the amount contributed to each participant’s account is specified in advance, and the retirement benefit isn’t guaranteed. What you invest for each person is defined, but the ultimate payout depends on investment performance over time.

That’s why the description that fits best is the one where employees and employers contribute a specific amount into the plan for each participant. The focus is on the fixed contributions entering individual accounts, not on promising a fixed retirement benefit.

The other descriptions don’t fit: a fixed formula describes a defined benefit plan with a guaranteed payout; benefits guaranteed by government refer to governmental programs rather than employer-sponsored defined contribution plans; and being not subject to any limits is incorrect because such plans do have contribution limits and rules.