What feature typically characterizes a defined contribution plan?

A defined contribution plan is characterized by the fact that the benefits received at retirement are based on the contributions made to the plan and the investment performance of those contributions. This means that the amount of money available to the participant upon retirement can fluctuate depending on how much was contributed over the years and how well those investments performed.

In these plans, both employees and employers can make contributions, which are usually defined as a percentage of the employee's salary. The understanding is that the future benefit is not predetermined; rather, it is directly tied to the value of the account at the time of retirement. This contrasts sharply with a defined benefit plan, where payouts are guaranteed based on a formula that considers salary history and years of service.

The correct understanding of a defined contribution plan highlights the variability of benefits, which are closely linked to actual contributions made rather than guaranteed amounts. This emphasis on contributions and service accurately captures the essence of how defined contribution plans operate.