- In a defined contribution, or DC, pension plan, employees and employers typically both contribute to the employee's pension plan and pension contributions are deposited into an individual account for the employee, who is then usually responsible for their own investment decisions.
- The main differences between DB and DC plans are:
- Members of DC plans must guess how long they will live in order to make sure their savings last – or purchase an annuity from a life insurance company, which can be very expensive. In a DB plan, on the other hand, benefits are guaranteed for life.
- In a DC plan, the employee assumes the investment risk. Market fluctuations can have a bigger impact on retirement income in a DC plan than a DB plan and therefore DC plans don't offer the same level of income predictability. A DB plan, on the other hand, bases benefits on a formula so individual members' benefits are not impacted by changes in the market.
- Under a DC pension model, fees can be passed on to plan members, which can have a significant financial impact on members' account balances.
- In most cases, the intention of DC plans is to help an employee save for retirement, rather than providing income in retirement.
Note: In addition to employer-sponsored pension plans, many employers may offer other types of Capital Accumulation Plans (CAPs) including Group Registered Retirement Savings Plans and Group Tax Free Savings Accounts. In general, CAPs have features similar to those outlined above for DC plans, which also fall into the CAP category.