How does a defined contribution plan work?

In a defined contribution plan, the employer sponsors the plan. But it’s the employee’s responsibility to contribute money to the plan, sometimes with an additional contribution from the employer, and select the investments. The employee’s due diligence and skill determine how much money will be in the plan when the retirement date arrives.

What is a defined benefit plan?

Defined benefit plans offer guaranteed salary-like payments and were historically offered in order to entice workers to stay with one company for years or even decades. Thanks to the rise of lower-cost defined contribution plans, defined benefit plans are much less prevalent today.

Are defined contribution plans better than defined benefit plans?

Employers today broadly favor defined contribution plans over defined benefit plans because of their lower cost and lack of responsibility for maintaining set benefit payouts. For employees, defined contribution plans have both pluses and minuses. Defined benefit pros include stability since the employer guarantees benefits will be paid.