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In a defined contribution retirement plan, the employer or employee or both contribute a certain amount to the employee’s individual retirement account, the money from this account is invested in something and the returns depends on well the investment turned out when the employee retires. Hence, the amount that an employee gets on retirement is not fixed.
When you retire, a defined contribution retirement plan gives you a certain amount of money which consists of your contribution plus or minus the investment gains or losses. It goes without saying that if your retirement funds are properly invested, you will your contribution plus the gains, and you will be buying a beautiful beach house in some exotic location to live the rest of your retirement life!
The main problem with defined contribution retirement plans is that the contribution keeps fluctuating depending on the results of the investment. This means you are never sure what to expect from this retirement plan. And, you will not know whether the risk involved is worthwhile.
Having a good broker to invest your contribution is mandatory because without a good broker it would be a big gamble and you could end up losing all your retirement money. This said, many large companies like IBM and HP are gradually moving towards defined contribution retirement plans as it saves them a lot of money. It has been estimated that by the year 2010, IBM would have saved approximately $3 billion because of contribution-based retirement plans.
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