A defined contribution plan is a type of retirement plan in which both employers and employees make regular contributions to individual accounts. The contributions are defined by the terms of the plan, typically as a percentage of the employee's salary or a fixed dollar amount. The ultimate retirement benefit is based on the accumulated contributions and the investment performance of the individual accounts.
An employee participates in a defined contribution plan where the employer contributes 3% of the employee's salary, and the employee contributes an additional 5%. If the employee's salary is $50,000, the employer would contribute $1,500 (3% of $50,000), and the employee would contribute $2,500 (5% of $50,000). The total annual contributions to the employee's account would be $4,000. The account balance would grow over time based on the investment performance of the chosen investment options.