What is the primary characteristic of defined contribution plans?

The primary characteristic of defined contribution plans is that each employee has an individual account. In these plans, both employers and employees can make contributions, and the funds are invested on behalf of the employee. The amount that ultimately accumulates in the account depends on the contributions made and the investment performance of the account over time. When the employee retires or leaves the company, they have access to the balance in their individual account, which they can then draw upon for retirement income.

This structure contrasts with defined benefit plans, where benefits are predetermined based on factors such as salary history and years of service, meaning that the benefits are not tied to individual accounts. In defined contribution plans, there is no guaranteed return from the employer; instead, the employee bears the investment risk. Consequently, the final benefit realized by the employee at retirement is not defined beforehand, but rather it is contingent upon the contributions made and the investment performance over the years.