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.