A defined contribution pension plan allows employers to determine the contributions to be made to a pension plan each year. Employers are often required to contribute a percentage of company income or employee salaries to a pension trust fund. As such, the accounting for the plan is mostly the responsibility of the employee.
Investment and actuarial risks lie with employees. This allows employers to avoid risks related to future pension obligations. Pension benefits are then distributed from the accumulated employee assets in the pension trust fund. Employees bear the risk of the plan’s investment performance. In other words, the employer has no liability to provide benefits under the plan beyond making the required contributions.
A defined contribution pension plan is often compared to a defined benefit pension plan. A defined contribution pension plan allows companies to offload risk and reduce record keeping in stark contrast to a defined benefit pension plan which results in the opposite. As a result, many companies will often chose or transition from a defined benefit pension plan to a defined contribution pension plan.« Back to Glossary Index