A defined contribution plan does not promise a specific amount of benefit at retirement like a defined benefit plan. Within a defined contribution plan, the contributions are invested on the employee’s behalf, and the benefits paid to employees are based on contributions and any earnings or losses. ¬†Employees or employers (or both) contribute to these plans. Typically, the contribution will be a percentage of compensation up to a certain dollar amount. Depending on the plan type, the contributions made by the employer may be mandatory or discretionary. For defined-contribution plans, employers are not required to make up for any losses on investments.

A defined-contribution plan can be a profit-sharing plan, an employee stock ownership plan (ESOP), a 401(k) plan or a money-purchase pension plan.