Certified Payroll Professional Practice Exam 2025 – Your All-in-One Guide to Exam Success

Question: 1 / 400

Which of the following best describes a defined contribution plan's structure?

Fixed payments based on years of service

Creates a pool of funds for collective advantage

Contributions are defined but outcomes may vary

A defined contribution plan is characterized by contributions that are predetermined, but the ultimate benefits that participants receive at retirement depend on various factors, including the performance of the investments made with those contributions. This means that while the amount that employees and employers contribute to the plan is fixed (i.e., defined), the eventual account balance and resulting payouts during retirement can fluctuate based on market performance and investment choices.

This structure contrasts with defined benefit plans, where retirement payouts are guaranteed based on factors like salary and years of service—hence, they are not directly tied to contribution levels or investment performance. Thus, understanding that defined contribution plans involve set contributions but variable outcomes is key to grasping their nature and implications for retirement planning.

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Provides a guaranteed retirement annuity

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