Which statement best describes a defined contribution plan?

• A. The employer guarantees a specific retirement benefit
• B. Contributions are made only by the employee
• C. Both employer and employee contribute a specified amount regularly
• D. All contributions are invested in a single asset class

Answer: (C)

A defined contribution plan is characterized by the systematic contributions made into an individual account set up for employees, where both the employer and employee typically contribute a specified amount on a regular basis. This structure allows for flexibility in funding the retirement plan, as the final benefit at retirement is based on the total contributions made and the investment performance of those contributions over time.

The contributions from both parties provide a sense of shared responsibility and engagement in the retirement savings process, which is essential for the plan's long-term viability. The total retirement benefits depend on various factors, including contribution amounts, time left until retirement, investment choices, and market performance.

Understanding this concept is crucial for evaluating how different retirement plans work and how they impact the retirement savings landscape for employees.