How are benefits from Defined Contribution Plans determined?

Benefits from Defined Contribution Plans are determined primarily by the amount contributed by both the employee and the employer, as well as the investment earnings accrued on those contributions over time. In this type of plan, there are individual accounts for each participant, and the final benefit at retirement depends on the total contributions made and the performance of the investments selected within the plan, such as stocks, bonds, or mutual funds.

Unlike defined benefit plans, where the benefits are predetermined based on salary and years of service, defined contribution plans do not promise a specific amount at retirement. Instead, their value fluctuates based on the contributions and how well the investments grow. This means that the more an employee contributes and the better the investments perform, the larger the retirement benefit will be. Therefore, the correct answer reflects the fundamental principle of how these plans operate, providing a direct relationship between contributions, investment performance, and the ultimate retirement benefit received by the participant.