Defined Contribution Plan

A defined contribution plan — the most common type in modern US retirement benefits, including 401(k) and 403(b) plans — specifies what the employer and employee contribute to an individual retirement account, but makes no guarantee about the eventual retirement benefit, which depends on contribution amounts and investment returns. The employee bears the investment risk, unlike defined benefit plans where the employer guarantees a specific monthly payment regardless of market performance. The most important employee-facing design decision is the default contribution rate and investment option: automatic enrollment at a meaningful default contribution rate (typically 3 to 6 percent) with a target date fund default significantly increases long-term retirement readiness for employees who would otherwise not actively elect to participate.