What is a Defined Contribution Plan?

A defined contribution plan is an employer-sponsored retirement plan that allows contributions to be made for employees based on a percentage of an employee’s compensation. Under a defined contribution plan, the maximum annual contribution on behalf of any plan participant may not exceed the lesser of 100 percent of compensation or $53,000 (or $59,000 if you are age 50 or older) for 2015 . Defined contribution plans include a wide range of plan types, including profit sharing plans, money purchase pension plans, employee stock ownership plans, target benefit plans, and 401(k) plans.

Defined contribution plans do not guarantee a specified retirement benefit. Rather, the employer makes contributions to the individual accounts of each plan participant and whatever the employee’s account balance is worth at retirement is what the employee receives.