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Generally, retirement plans fall into one of two categories:
(1) Defined contribution plans, and (2) defined benefit plans. A
defined contribution plan is a plan under which a separate
account is maintained for each plan participant and where income,
expenses, gains and losses are allocated to each participant's
account. Sec. 414(i).8 Under a defined contribution plan, the
employee is not guaranteed a particular benefit, but is instead
provided with the account balance upon retirement. Thus, the
retirement benefit provided by a defined contribution plan
depends on the investment performance of the contributions made
by the employer and the participant, and the participant bears
the risk of loss if the plan's investments do not perform as well
as expected.
A defined benefit plan is any plan that is not a defined
contribution plan. Sec. 414(j). The retirement benefit provided
by a defined benefit plan is fixed, typically by reference to a
formula based on salary and years of service. Thus, if the plan
does not perform as well as expected, the employer bears the risk
of loss because the employer is contractually obligated to pay
the retirement benefit specified in the plan.
8 Sec. 414(i) provides:
(i) Defined Contribution Plan.-- * * * the term
"defined contribution plan" means a plan which provides for
an individual account for each participant and for benefits
based solely on the amount contributed to the participant's
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be
allocated to such participant's account.
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Last modified: May 25, 2011