What is a characteristic of a Defined Contribution Plan?

A Defined Contribution Plan is characterized by the fact that the retirement benefits received by participants depend on the investment performance of the contributions made to the plan. In this structure, both employees and sometimes employers contribute funds to the individual's account, which are then invested in various options like stocks, bonds, or mutual funds.

As investment performance can vary, the total amount available at retirement can fluctuate significantly; it is the growth or decline of these investments that ultimately determines the retirement benefits. This contrasts with a Defined Benefit Plan, which guarantees a specific payout at retirement based on factors like salary history and years of service.

Other choices suggest aspects that are characteristics of different types of plans. For example, guaranteeing a specific amount at retirement relates to Defined Benefit Plans, while the notion that contributions are made exclusively by the employee is not entirely accurate since many Defined Contribution Plans allow employer contributions as well. Additionally, retirement plans do typically allow for employee contributions, so stating that a Defined Contribution Plan does not allow them is misleading.