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What is the difference between defined benefit and defined contribution?

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What is the difference between defined benefit and defined contribution?

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What is the difference between defined benefit and defined contribution?

A defined contribution plan provides an individual account for each participant. The benefits are based on the amount contributed and are also affected by income, expenses, gains and loses. Some examples of defined contribution plans include 401(K) plans, 403(b) plans, employee stock ownership plans and profit sharing plans.

A defined benefit plan promises the participant a specific monthly benefit at retirement and may state this as an exact dollar amount. Monthly benefits could also be calculated through a formula that considers a participants salary and service. A participant is generally not required to make contributions in a private sector fund but most public sector funds require employee contributions. Unlike defined contribution plans, the participant is not required to make investment decisions. A defined benefit plan is sometimes referred to as a fully funded pension plan.

Source: http://retireplan.about.com/cs/retirement/a/aa_defined_a5.htm

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  • MBA, Rochester Institute of Technology
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