Defined contribution plan

What a defined contribution plan is

ERISA calls it an individual account plan. Contributions from the employee, the employer or both go into each person’s account, and the account rises and falls with its investments. There is no promised benefit, so the participant bears the investment risk. 401(k), 403(b), profit sharing, money purchase and employee stock ownership plans are all defined contribution plans.

Why it matters to employers

Your cost is the contribution you choose or promise, not a funding obligation that moves with the markets. Your duties are to deposit contributions on time, offer prudently chosen investments and stay within the limits. In 2026 total annual additions to a participant’s account are capped at $72,000, and employee deferrals at $24,500.

For 2027 those limits rise to $75,000 and $25,500. (IRS Notice 2026-66)

Example

An employee defers $10,000, receives a $4,000 match, and her investments gain $1,000. Her account is worth $15,000 at year end, subject to vesting on the match. Nobody guarantees what that account will provide in retirement.

Common mistakes

• Assuming that because participants bear the risk, the employer has no investment duty. Fiduciaries still select and monitor the options.

• Counting only deferrals against the annual additions limit. Employer and after-tax contributions count too.

• Calling a cash balance plan a defined contribution plan because it shows an account balance.