Final answer:
A pension plan that pays benefits based on investment performance is known as a defined contribution plan, such as 401(k)s and 403(b)s, where both employer and employee contribute and invest funds for retirement.
Step-by-step explanation:
A pension plan that pays employees benefits upon retirement based on how well the investments in the pension plan perform is generally known as a defined contribution plan. These plans are increasingly common, replacing the traditional defined benefits pension plans. In a defined contribution plan, such as 401(k)s and 403(b)s, the employer contributes a fixed amount to a worker's retirement account on a regular basis. The employee usually contributes as well, and the worker invests these funds across various investment vehicles. These plans are advantageous due to their tax-deferred nature and portability, allowing individuals to take their 401(k) with them if they change employers. Essential to these plans is their ability to potentially offset the effects of inflation, as the investment returns can generate real rates of return for retirees.