Editing Pension (section)

==Defined contribution plans==
{{Main|Defined contribution plan}}
A defined contribution (DC) plan, is a pension plan where employers set aside a certain proportion (i.e. contributions) of a worker's earnings (such as 5%) in an investment account, and the worker receives this savings and any accumulated investment earnings upon retirement.<ref>Gruber, J. Public Finance and Public Policy, Worth Publishers. G-3 (Glossary)</ref> These contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the U.S. has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan.

Money contributed can either be from employee salary deferral or from employer contributions. The [[Portability (social security)|portability]] of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans (you do not need to pay an actuary to calculate the lump sum equivalent that you do for defined benefit plans) in practice, defined contribution plans have become generally portable.

In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer, and these risks may be substantial.<ref>{{cite journal |last=Cannon |first=Edmund |author2=Ian Tonks |title=The Value and Risk of Defined Contribution Pension Schemes: International Evidence |journal=Journal of Risk and Insurance |volume=80 |pages=95–119 |year=2012 |doi=10.1111/j.1539-6975.2011.01456.x |hdl=10036/86956 |url=http://www.bristol.ac.uk/efm/media/workingpapers/working_papers/pdffiles/dp09610.pdf |s2cid=7975555 |archive-url=https://web.archive.org/web/20190430181403/http://www.bristol.ac.uk/efm/media/workingpapers/working_papers/pdffiles/dp09610.pdf |archive-date=2019-04-30 |url-status=live}}</ref> In addition, participants do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets. (In the United Kingdom, for instance, it is a legal requirement{{update inline|date=April 2020}} to use the bulk of the fund to purchase an annuity.)

The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the ''contribution is known'' but the ''benefit is unknown'' (until calculated).

Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers.

===Examples===
In the United States, the legal definition of a defined contribution plan is a plan providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account (see {{uscsub|26|414|i}}). Examples of defined contribution plans in the United States include [[individual retirement account]]s (IRAs) and [[401(k)|401(k) plans]]. In such plans, the employee is responsible, to one degree or another, for selecting the types of [[investment]]s toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined [[mutual fund]]s to selecting individual [[capital stock|stock]]s or other financial assets. Most self-directed retirement plans are characterized by certain [[tax advantage]]s, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age—typically the year the employee reaches 59.5 years old (with a small number of exceptions)—without incurring a substantial penalty.

Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts.

In the US, defined contribution plans are subject to [[Internal Revenue Service|IRS]] limits on how much can be contributed, known as the section 415 limit. In 2009, the total deferral amount, including employee contribution plus employer contribution, was limited to $49,000 or 100% of compensation, whichever is less. The employee-only limit in 2009 was $16,500 with a $5,500 catch-up. These numbers usually increase each year and are indexed to compensate for the effects of inflation. For 2015, the limits were raised to $53,000 and $18,000,<ref>{{Cite web|url=https://www.irs.gov/uac/Newsroom/IRS-Announces-2015-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$18,000-to-their-401(k)-plans-in-2015|title=IRS Announces 2015 Pension Plan Limitations; Taxpayers May Contribute up to $18,000 to their 401(k) plans in 2015}}</ref> respectively.

Examples of defined contribution pension schemes in other countries are, the UK's personal pensions and proposed [[National Employment Savings Trust]] (NEST), Germany's Riester plans, Australia's Superannuation system and New Zealand's KiwiSaver scheme. Individual pension savings plans also exist in Austria, Czech Republic, Denmark, Greece, Finland, Ireland, Netherlands, Slovenia and Spain.<ref>{{cite book |author1=((Economic Policy Committee)) |name-list-style=and |author2=((European Commission)) |title=The impact of ageing on public expenditure |year=2006 |publisher=EU}}{{full citation needed|date=April 2023|reason=If this is really a book, the ISBN would be nice.}}</ref>