Who bears the investment risk in a defined contribution (DC) plan?

• A. The employer
• B. The employee
• C. The plan administrator
• D. The government

Answer: (B)

In a defined contribution (DC) plan, the employee bears the investment risk. This structure means that the contributions made by both the employee and potentially the employer are invested in various options that the employee chooses, often including stocks, bonds, and mutual funds. The performance of these investments directly affects the retirement savings available upon withdrawal.

If the investments perform well, the account balance can grow significantly, benefitting the employee at retirement. Conversely, if the investments underperform or suffer losses, the account balance may be lower than expected at retirement, resulting in less income for the employee in their golden years. This concept is fundamental to the operating mechanism of defined contribution plans, distinguishing them from defined benefit plans, where the employer typically assumes the investment risk and guarantees a specific payout upon retirement.