Question

The amount of benefits to be received by employees enrolled in definite contribution plan is

a. dependent on the contributions and investment income of the fund.
b. an amount that can be determined by reference to the plan formula.
c. equal to the contributions made to the plan.
d. the actuarial present value of all contributions to the fund, adjusted for investment income and costs of managing the fund.

Answer 1

The benefits of a defined contribution plan, such as 401(k)s and 403(b)s, are based on the contributions and the investment income earned from those contributions, not a predetermined formula.

Step-by-step explanation:

The amount of benefits to be received by employees enrolled in a defined contribution plan is dependent on several factors. These plans, which include 401(k)s and 403(b)s, require contributions by both the employer and the employee. |

The future benefits depend on the contributions made over time, as well as the investment income earned from the range of investment vehicles chosen for the funds.

It is not a set amount determined by a formula, nor is it equal to just the contributions made, or the actuarial present value of these contributions.

Instead, the final benefit amount is influenced by the actual performance of the investments, which may generate real rates of return, helping to offset the impact of inflation that retirees would suffer with traditional defined benefits pension plans.