What is the difference between defined contribution and defined benefit plans?
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UPDATED: Jul 16, 2021
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Defined contribution plans require the employer to contribute certain amounts each year to a retirement account established for you. A 401(k) plan is one type of defined contribution plan. Other types of defined contribution plans include profit-sharing plans, money purchase plans and employee stock ownership plans.
Defined benefit plans promise you a monthly pension of a certain amount, usually based on your average income during your final years of employment, your age at retirement and your years of service, but there is no actual account set up for you.
There are a lot of variations within these two broad categories of pension plans. It’s important to know these terms because these two types of plans function differently and the law law treats them differently.