Question

Which of the following characteristics describe defined contribution plans? (Check all that apply.) (Multiple Select)

a) The employee bears the investment risk and funding responsibility.
b) Employers choose how the amounts in the retirement account are invested.
c) The plan specifies the amount of the distribution at retirement rather than the up-front payment the employer will make to the employee's plan.
d) Employers must maintain separate accounts for each employee participating in the plan.
e) Employees may contribute more to the plan than the employer contributes.

Answer 1

Defined contribution plans, like 401(k)s and 403(b)s, are retirement accounts where both employer and employee may contribute, with employees bearing the investment risk. These plans are tax-deferred, portable, and do not specify the retirement distribution amount but focus on the contributions made during the employee's career.

Step-by-step explanation:

Defined contribution plans are employer-sponsored retirement plans where the employer, and often the employee, contribute a fixed amount to the employee's retirement account. The characteristics that describe defined contribution plans include the following:

• The employee bears the investment risk and funding responsibility.
• Employers must maintain separate accounts for each employee participating in the plan.
• Employees may contribute more to the plan than the employer contributes.

Employers do not choose how the amounts in the retirement account are invested; this decision falls on the employees who direct their own investments within the options provided by the plan. Also, defined contribution plans do not specify the amount of distribution at retirement but rather the up-front payment made to the plan. Lastly, defined contribution plans such as 401(k)s and 403(b)s are tax-deferred and portable, offering flexibility and potential protection against inflation for retirees.