Question

Which is a characteristic of a defined contribution plan?

a.) Annual contribution is limited to 25% of covered compensation.
b.) Contributions are actuarially determined.
c.) Covered by PBGC.
d.) Investment risk is borne by the employer.

Answer 1

A defined contribution plan is a retirement plan where the employer contributes a fixed amount to the worker's retirement account, and the investment risk is borne by the employee(option d).

Step-by-step explanation:

A defined contribution plan is a type of retirement plan where the employer contributes a fixed amount to the worker's retirement account on a regular basis. The employee often contributes as well. The key characteristic of a defined contribution plan is that the investment risk is borne by the employee, not the employer.

This means that the employee is responsible for managing and investing the funds in their retirement account.Option (d) is the correct answer as it states that the investment risk is borne by the employer. This is a defining characteristic of a defined contribution plan.

In contrast, option (a) is incorrect because there is no specific limit on the annual contribution, it can vary depending on the plan and individual circumstances. Option (b) is also incorrect as contributions are not actuarially determined, they are based on a fixed amount or percentage. Option (c) is incorrect because defined contribution plans are not covered by the Pension Benefit Guaranty Corporation (PBGC).