What is the difference between a defined-benefit plan and a defined-contribution plan?
Most retirement programs offered by employers fall into one of two categories: Defined-benefit plans and defined-contribution plans. In a defined-benefit plan, the employer promises its workers that they will receive a specific benefit when they retire. Most traditional pension plans are defined-benefit programs: Employees are told exactly how much they ll receive and when. In other words, those benefits are defined. In a defined-contribution plan, such as a 401(k), the company promises to make a specified contribution to each worker s retirement fund. However, no promises are made about the exact amount the worker will ultimately receive at retirement. That amount will vary depending on the performance of the worker s investments. Only the company s contribution is defined.
