Defined Contribution Plan
A retirement plan where the employer and/or employee contribute a fixed amount to individual investment accounts (like a 401k or 457b), with no guaranteed benefit amount.
How It Works
In a defined contribution (DC) plan, the employee bears the investment risk — their retirement income depends on how well their investments perform. Some cities have shifted new employees from defined benefit pensions to DC plans or hybrid plans to reduce long-term fiscal risk. Critics argue that DC plans provide inadequate retirement security for workers who may not be investment-savvy.
Related Terms
- Defined Benefit Pension — A retirement plan where the employer guarantees a specific monthly payment for life based on years of service and final salary — the traditional government pension.
- Hybrid Pension Plan — A retirement plan that combines elements of a defined benefit pension (guaranteed minimum) with a defined contribution component (individual investment accounts).
About This Definition
This definition is part of the CitySpend Municipal Finance Glossary — 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.