What is the difference between defined contribution and defined benefit

The employer bears the risk of providing the guaranteed level of retirement benefits. In , 56 percent of full-time employees of medium and large private establishments were covered by defined benefit plans U.

Department of Labor, Defined benefit plan sponsors may choose from several formulas for determining final retirement benefits. In a defined contribution plan, employers generally promise to make annual or periodic contributions to accounts set up for each employee. Sometimes defined contribution plans are referred to as individual account plans. The current contribution is guaranteed but not a level of benefits at retirement, as in a defined benefit plan.

In , 49 percent of full-time employees in medium and large private establishments participated in one or more defined contribution plans, up from 45 percent in U. Sometimes there are only employer contributions, sometimes only employee contributions, and sometimes both.

The accumulated money will reflect employer contributions, employee contributions if any , and investment gains or losses. The accumulated amount may also include employer contributions forfeited by employees who leave before they become fully vested, to the extent such contributions are reallocated to the accounts of employees who remain. These are called forfeitures. Many companies featured on Money advertise with us. Opinions are our own, but compensation and in-depth research determine where and how companies may appear.

Learn more about how we make money. A defined benefit plan, most often known as a pension, is a retirement account for which your employer ponies up all the money and promises you a set payout when you retire.

A defined contribution plan, like a k or b , requires you to put in your own money. Because defined benefit plans are more costly for employers than defined contribution plans, most of them have - you guessed it - scaled back dramatically or eliminated these plans altogether in recent years.

Few private companies possess these resources. The account is funded by contributions from the employee and employer at a rate that is usually spelled out or defined in the employment agreement — hence the name. When employees retire, they take their account with them with whatever assets it has accrued.

The familiar IRA and k accounts work this way. DC plan members usually have some control over where and how the funds in their accounts are invested. Even short-term losses can be significant if they occur when the funds are needed. If the account is ever exhausted, then so are the benefits, and members can outlive their retirement fund.

Any retirement plan will be affected by the general health of the economy and by the performance of the investments that it makes. However, a DB plan removes the risk from the individual and places it on the plan itself.