In a Defined Contribution (DC) plan, employers provide employees with individual investment accounts and promise to contribute a certain amount to the accounts (e.g., 4 percent to 8 percent of salary) while the employee is employed. Employees can also contribute to their accounts and decide how the assets are invested, choosing from a number of funds representing major investment categories. Investment management fees are paid from the employee’s account, reducing the funds available to pay benefits. At retirement, the employee’s benefit is paid solely from the contributions and investment earnings that have accumulated in the individual’s account.

For employers, one advantage of DC plans is that the employer’s contribution rate is fixed and unaffected by downturns in investment markets. Moreover, the employer has no financial liability for the employees after they retire, even if the DC accounts are insufficient to provide an adequate retirement benefit. (While this may be an advantage for the employer, it is a disadvantage for taxpayers who may have to pay increased public financial assistance as a result.)

A disadvantage for employers is that DC plans may not be a strong incentive for attracting and retaining qualified employees, especially if competing employers are offering DB plans. Moreover, if employees’ account balances are inadequate to provide retirement benefits when the employees intend to retire, employers can end up with a number of active employees who are not performing at peak productivity (also known as being "retired in place"). Another disadvantage is that, since the employer’s contribution rate is fixed in a DC plan, upturns in the investment markets do not reduce the employer’s contribution rate, as they do in DB plans.

For employees, one advantage of DC plans is that the vesting period is typically shorter than for DB plans. Six months to two years is typical. Moreover, DC accounts are easier to transfer if employees change jobs. A major disadvantage is that DC accounts are subject to investment risk and may not be enough to sustain employees throughout their retirement. Another disadvantage is that a high percentage of employees cash-out and spend some or all of their DC accounts when they change jobs, significantly reducing the amounts available to pay retirement benefits.