What is a defined contribution plan?

A defined contribution plan is indeed characterized by variable employee contributions, meaning that the amount contributed to the plan is determined by the employee and can vary over time. In such plans, both employees and often employers can make contributions to an individual account. The total amount available at retirement is dependent on the contributions made and the investment performance of those contributions.

As the investments in a defined contribution plan grow over time, the final retirement payout can fluctuate based on market conditions, which is why it’s considered a variable plan. This approach allows employees to have greater control over how much they save for retirement and how those savings are invested. Importantly, the risk of investment performance and retirement payout rests with the employee rather than the employer.