Which feature characterizes a defined contribution plan?

In a defined contribution plan, the benefits that an employee receives upon retirement are directly tied to the contributions made to the plan as well as the performance of the investments made with those contributions. This means that both the employee and often the employer can make contributions to the employee's individual account within the plan. The amounts in the account grow based on the returns generated by the investments, which can include stocks, bonds, and other assets.

This characteristic sets defined contribution plans apart from defined benefit plans, where a guaranteed payout is promised regardless of investment performance. The reliance on investment performance means that the retirement benefits can vary considerably depending on how well the investments perform over time. Thus, the potential for higher returns comes with the accompanying risk that the account balance could be lower than expected, depending on market conditions at the time of retirement.