What is a defined contribution plan?

A defined contribution plan "provides for an individual account for each participant." The value of the plan benefit is equal to the sum of the amount contributed to the account, any income, expense, gain or loss, and any forfeiture of accounts of other participants. Defined contribution plans include, but are not limited to, the following:

1. Money purchase pension plans;
2. Profit sharing plans;
3. Target benefit plans;
4. 401(k) plans; and,
5. Employee stock ownership plans.

Three major consequences result when a retirement plan is classified as a defined contribution plan: plan contributions are determined by formula and not by actuarial requirements (except for target benefit plans); plan earnings and losses are allocated to each participant's account and do not affect the employer's retirement plan costs; and plan benefits are not insured by the Pension Benefit Guaranty Corporation.