What is a defined contribution pension plan (DCPP)?

• A. A pension plan where benefits are fixed by the plan regardless of contributions.
• B. A pension plan where benefits are payable and determined by members and/or employer contributions and investment performance within the plan on those contributions.
• C. A pension plan funded entirely by government
• D. A savings account with no investment risk

Answer: (B)

Defined contribution pension plans determine retirement benefits by the actual growth of contributions invested inside the plan. The plan sets up accounts for members and tracks the contributions from the member and possibly the employer, plus any investment earnings (or losses) from those contributions. The key point is that the eventual pension isn’t fixed in advance; it depends on how much was contributed and how the investments performed over time. The member bears the investment risk, and the retirement income comes from the accumulated value of those contributions and investment returns at the time of retirement.

This differs from a defined benefit plan, where the benefit is predetermined based on factors like salary and years of service. It also isn’t a government-funded plan, nor simply a risk-free savings account, since investment performance drives the outcome.