HR Glossary

Defined Contribution

Defined contribution is a type of retirement plan that clearly defines the amount of contributions, which both the employee and employer pay on a regular basis.

what-is-defined-contribution

Defined contribution definition

Defined contribution is a type of retirement plan that clearly defines the amount of contributions, which both the employee and employer pay on a regular basis.

How defined contribution works

In defined contribution plan the employee gives a fixed amount or a percentage of his/her paychecks in an account that is intended to fund his/her retirement and the employer matches a portion of employee contributions. The most common type of defined contribution plan is a savings and thrift plan.

The benefits payable at retirement depend on several factors including future investment return and annuity rate at retirement.

Advantages of defined contribution

This type of retirement plan is generally tax-defferd and generally allow balances to grow larger over time compared to taxable accounts.

Defined contribution plans also include automatic participant enrollment, automatic contribution increases, hardship withdrawals, loan provisions and catch-up contributions for employees age 50 and older.

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