In a Defined Contribution Plan, who bears the investment risk?

In a Defined Contribution Plan, the investment risk is borne by the employee. This structure means that the contributions made by both the employee and, in many cases, the employer go into individual accounts, and the funds are then invested according to the employee's choices. The value of the retirement account at the time of withdrawal depends on the performance of the investments selected by the employee, which can fluctuate based on market conditions.

As a result, if the investments perform poorly, the account balance may be less than anticipated, affecting the employee's retirement savings. Conversely, if the investments perform well, the account balance could be higher than expected. This shifting of risk to the employee is a key difference from Defined Benefit Plans, where the employer typically assumes the investment risk and guarantees a specific level of benefits upon retirement.