Question

For which of the following pension plans do employers or employees contribute fixed amounts per year into the pension fund?

1) defined benefit pension
2) defined contribution pension
3) both of the above
4) none of the above

Answer 1

Fixed amounts per year are contributed by employers or employees in a defined contribution pension plan, whereas defined benefit pension plans offer fixed annual payments without a set contribution amount.

Step-by-step explanation:

Employers or employees contribute fixed amounts per year into the pension fund in a defined contribution pension plan. In contrast, defined benefit pension plans are increasingly rare and provide retirees with fixed annual payments. These are not based on a fixed contribution rate but rather on a formula that takes into account factors like salary history and duration of employment. With defined contribution plans, such as the 401(k)s and 403(b)s, the contributions are fixed, tax-deferred, and portable, allowing for greater flexibility and protection from inflation.

In the context of pension plans, the option where employers or employees contribute fixed amounts per year into the pension fund is a defined contribution pension. Defined contribution pensions, such as 401(k)s and 403(b)s, involve regular contributions from both employers and employees. These contributions are invested by the worker in various investment vehicles. This type of pension plan offers portability and tax deferral benefits.