Which statement describes how a defined contribution plan is funded?

• A. Benefits are determined by a fixed formula
• B. Employee and employer contribute a specific amount into the plan for each participant
• C. The government guarantees a payout
• D. The plan cannot invest in stocks

Answer: (B)

In a defined contribution plan, the funding is determined by contributions that are specified in advance and allocated to each participant’s account. Both the employee and often the employer contribute a set amount or percentage into individual accounts, and the eventual payout depends on how those contributions grow through investments over time.

This differs from a defined benefit plan, where benefits are calculated by a fixed formula. There is no government guarantee for private defined contribution plans, and these plans can and often do invest in stocks, among other investments.