A defined contribution pension plan is a pension plan in which the employer makes a specific contribution per period of time, typically months or years. However, when the employee retires, the amount the employee can withdraw is not fixed. Instead, it depends on the success of the investments made. In the context of insurance, defined contribution pension plans are often paired with life insurance policies to plan for retirement.
Defined contribution pension plans can be a great way to generate a fixed income during retirement. However, problems can arise if the investments perform poorly. This is especially true if the stock market experiences a crash or a strong recession. Due to the way that defined contribution pension plans are structured, the employee typically controls the investments. So, the responsibility for the success of the investments falls on the employee and not the pension provider. Many companies see this as an advantage of defined contribution pension plans. These types of plans are also valued by employers due to their fixed, gradual contribution requirements.
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