In a defined contribution plan, who bears the investment risk, and how is retirement benefit determined?

In a defined contribution plan, who bears the investment risk, and how is retirement benefit determined?

• A. The participant bears investment risk; retirement benefit equals the account balance based on contributions and investment performance.
• B. The employer bears investment risk; retirement benefit is a fixed amount specified in the plan.
• C. The plan sponsor bears investment risk; retirement benefit is based on years of service.
• D. The plan fiduciaries guarantee a minimum benefit regardless of performance.

Answer: (A)

In a defined contribution plan, the investment risk sits with the participant. The retirement benefit isn’t predetermined; it depends on the actual account balance at distribution, which is influenced by the contributions (employee and sometimes employer) and how the investments perform over time, minus any fees. So you’re not promised a fixed payout—the amount available at retirement will vary with market performance and the contributions you and your plan have made. Why the other descriptions don’t fit: those speak to defined benefit features, where a pre-set formula determines a retirement amount and the employer (or plan sponsor) bears the funding and investment risk. Likewise, saying a fiduciary guarantees a minimum benefit would imply a guarantee that isn’t provided in a typical defined contribution plan.

In a defined contribution plan, the investment risk sits with the participant. The retirement benefit isn’t predetermined; it depends on the actual account balance at distribution, which is influenced by the contributions (employee and sometimes employer) and how the investments perform over time, minus any fees. So you’re not promised a fixed payout—the amount available at retirement will vary with market performance and the contributions you and your plan have made.

Why the other descriptions don’t fit: those speak to defined benefit features, where a pre-set formula determines a retirement amount and the employer (or plan sponsor) bears the funding and investment risk. Likewise, saying a fiduciary guarantees a minimum benefit would imply a guarantee that isn’t provided in a typical defined contribution plan.