A defined contribution plan is a retirement plan where the employer, employee, or both make contributions to individual accounts. The future benefits depend on the contributions made and the investment performance of those contributions.
5 Must Know Facts For Your Next Test
Contributions are recorded as current liabilities until paid.
Employers may match employee contributions up to a certain percentage.
Investment risk is borne by the employee, not the employer.
The amount contributed is defined, but future benefits are not guaranteed.
Common examples include 401(k) and 403(b) plans.
Review Questions
How are employer contributions to a defined contribution plan recorded in financial statements?
Who bears the investment risk in a defined contribution plan?
What determines the future benefits in a defined contribution plan?
Related terms
Pension Plan: A retirement plan where employers provide regular payments to retired employees based on their previous earnings and tenure.
401(k) Plan: A specific type of defined contribution plan that allows employees to save for retirement with pre-tax dollars.
Current Liabilities: Financial obligations due within one year, including wages payable, taxes payable, and short-term loans.