How do defined benefit and defined contribution plans differ?

Defined benefit plans guarantee a fixed retirement income based on a formula that usually considers factors such as salary history and years of service. This means that when an employee retires, they receive a predetermined amount, regardless of how the investments performed. This provides financial security as the employer is responsible for ensuring that the promised benefits are funded and available at retirement.

The other options lack accuracy regarding their definitions. For instance, defined contribution plans are not limited to employer contributions; employees can also contribute, often with the employer matching a portion of those contributions. Defined benefit plans are generally considered more complex due to the calculations involved in determining benefits and the management of funding requirements. Additionally, defined contribution plans do not offer guaranteed returns; the retirement income depends on the contributions made and the performance of the investments chosen by the employee.