Defined Contribution Plan
A type of retirement plan that creates an individual account for each employee funded by contributions by the employer, the employee, or both. The amount contributed is set, either as a dollar amount or by formula (for example, a certain percentage of the employee's earnings). Unlike a defined benefit plan, which guarantees that the employee will be paid a certain amount on retirement, a defined contribution plan guarantees the employee only the value of his or her account upon retirement: amounts contributed to the plan plus or minus investment gains or losses. A 401(k) plan is a type of defined contribution plan.