INDIVIDUAL ACCOUNT PLAN (DEFINED CONTRIBUTION PLAN)

Generally speaking, there are two types of pension plans: defined benefit plans and defined contribution plans. A defined benefit plan promises participants a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service - for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer.

A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the participant or the employer (or both) contribute to the participant's individual account under the plan, sometimes at a set rate, such as 5 percent of their earnings annually. These contributions generally are invested on the participant's behalf. The participant will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to changes in the value of investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.

ERISA does not use the term Defined Contribution Plan in its formal definitions.  Rather, it uses the concept of an "Individual Account Plan as follows:

§ 1002. Definitions

For purposes of this subchapter:

(34) The term “individual account plan” or “defined contribution plan” means a pension plan which provides for an individual account for each participant and for benefits based solely upon 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.