How do defined contribution plans differ from defined benefit plans?

Defined contribution plans specify the amount that both employees and employers contribute to the individual accounts established for the employees. These contributions are typically based on a percentage of the employee's salary or a fixed dollar amount, allowing for flexibility in funding based on the plan's design and provisions.

This structure contrasts with defined benefit plans, which promise a specific retirement benefit at retirement based on a formula that often considers salary history and years of service. In defined contribution plans, the retirement benefit ultimately depends on the investment performance of the contributions made, rather than a predetermined formula, emphasizing the responsibility on employees to manage their accounts and investment choices effectively.

The other options highlight characteristics that either don't accurately describe how defined contribution plans operate or mischaracterize the nature of defined benefit plans. For instance, defined benefit plans guarantee a specific payout based on a formula rather than employee contributions, and they also provide less control to employees compared to defined contribution plans, where choices about investments and withdrawal options are in the employee's hands.