What is a potential disadvantage of defined contribution plans?

Defined contribution plans present a unique structure where the retirement benefits an employee receives are based on the contributions made to the plan and the performance of the investments chosen. The potential disadvantage of these plans primarily revolves around investment risk being borne by the employee.

In a defined contribution plan, the employee makes contributions, often alongside employer contributions, into individual accounts that are invested in various financial vehicles. The final benefit at retirement depends on the total contributions and investment performance over time. This structure means that if the investments perform poorly, the employee's retirement savings can significantly decrease, leading to potential financial insecurity in retirement. Unlike defined benefit plans, which guarantee a certain level of income based on salary and years of service, defined contribution plans do not provide any income guarantee, placing the responsibility of investment risk solely on the employee.

In contrast to the other options, which may highlight features associated with different designs or are not inherent disadvantages of defined contribution plans, the shift of investment risk to the employee distinctly marks a challenging aspect of these retirement plans.