Difficulty: Easy

Average Score: 100%

A defined contribution plan

Rationale

A defined contribution plan promises a specified payment to the plan by the employer.

In a defined contribution plan, the employer commits to contributing a specified amount or percentage of an employee's salary to the retirement account, but the eventual retirement benefits depend on investment performance and contributions over time.

A (guarantees a specified retirement benefit to the employee.) YOUR ANSWER

This statement describes a defined benefit plan rather than a defined contribution plan. In defined benefit plans, the employer guarantees a specific payout upon retirement, based on factors like salary history and years of service. In contrast, defined contribution plans do not guarantee a set benefit amount.

B (promises a specified payment to the plan by the employer.) CORRECT

This choice correctly defines a core feature of defined contribution plans. Employers contribute a fixed amount or percentage into the employee's retirement account. The ultimate retirement benefit depends on the contributions made and the investment performance of the account.

C (promises to never change the retirement payments.) YOUR ANSWER

This statement is misleading as it implies that retirement payments are fixed or guaranteed, which is not the case in defined contribution plans. The payments received upon retirement can vary widely based on how much has been contributed and how well the investments have performed, meaning they are not set in stone.

D (allows the employer to discriminate amongst employees.) YOUR ANSWER

While defined contribution plans can have different contribution rates for different employees, the term "discriminate" suggests unfairness or bias. In reality, plans must adhere to regulations that promote fairness and equality in benefits among employees, making this choice misleading as a defining characteristic.

Conclusion

Defined contribution plans are centered around employer contributions made to individual retirement accounts, with benefits that fluctuate based on investment outcomes. Unlike defined benefit plans, they do not guarantee a specific retirement payout, making understanding this distinction crucial for employees evaluating their retirement options.

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