What is the primary focus of a defined contribution plan?

What is the primary focus of a defined contribution plan?

• A. The employer's guarantee of benefits
• B. The investment risk is shared
• C. The individual manages the investment decisions
• D. All benefit levels are predetermined

Answer: (C)

The primary focus of a defined contribution plan is that the individual manages the investment decisions. In this type of retirement plan, both the employer and employee make contributions to the individual's account, but there is no guarantee of the amount of benefits that will be paid out upon retirement. Instead, it is the responsibility of the individual to direct how the contributions are invested within the options provided by the plan. This means that the individual can choose from various investment vehicles, such as mutual funds, stock options, or bonds, allowing them to tailor their investment strategy according to their risk tolerance and retirement goals. The decisions made by the individual can significantly affect the account's value at retirement, which is why active engagement in managing these investments is crucial. This structure contrasts with defined benefit plans where benefits are predetermined and provided based on a formula involving salary and years of service, placing the investment risk primarily on the employer. In summary, the focus on individual management in defined contribution plans emphasizes personal responsibility in securing retirement outcomes.

The primary focus of a defined contribution plan is that the individual manages the investment decisions. In this type of retirement plan, both the employer and employee make contributions to the individual's account, but there is no guarantee of the amount of benefits that will be paid out upon retirement. Instead, it is the responsibility of the individual to direct how the contributions are invested within the options provided by the plan. This means that the individual can choose from various investment vehicles, such as mutual funds, stock options, or bonds, allowing them to tailor their investment strategy according to their risk tolerance and retirement goals.

The decisions made by the individual can significantly affect the account's value at retirement, which is why active engagement in managing these investments is crucial. This structure contrasts with defined benefit plans where benefits are predetermined and provided based on a formula involving salary and years of service, placing the investment risk primarily on the employer. In summary, the focus on individual management in defined contribution plans emphasizes personal responsibility in securing retirement outcomes.