Which statement best describes a defined contribution plan?

• A. It places investment risk on the employee
• B. It guarantees a fixed benefit
• C. It is not regulated
• D. It cannot include employee contributions

Answer: (A)

In a defined contribution plan, the retirement benefit is not fixed; the amount you receive depends on how the invested contributions perform over time. The investment risk is borne by the employee because there is no guaranteed payout. The plan typically specifies how much is contributed (by you, your employer, or both) and offers investment options, but the ultimate retirement value varies with market returns.

This is different from a defined benefit plan, where a guaranteed benefit is promised based on formulas involving salary and years of service, and the employer bears the investment and longevity risk.

It’s also not true that defined contribution plans are unregulated; they are governed by applicable regulations (such as ERISA in the U.S.), and they generally do allow employee contributions (for example, through salary deferrals in a 401(k) plan).