what is a defined contribution dc plan 
a defined contribution dc plan is a retirement plan that s typically tax deferred like a 401 k or a 403 b in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements in addition the sponsor company can match a portion of employee contributions as an added benefit 1these plans place restrictions that control when and how each employee can withdraw from these accounts without penalties investopedia julie bangunderstanding defined contribution dc plansthere is no way to know how much a dc plan will ultimately give the employee upon retiring as contribution levels can change and the returns on the investments may go up and down over the years dc plans accounted for 11 trillion of the 34 2 trillion in total retirement plan assets held in the united states as of dec 31 2021 according to the investment company institute ici 2 the dc plan differs from a defined benefit db plan also called a pension plan which guarantees participants receive a certain benefit at a specific future date 1dc plans take pre tax dollars and allow them to grow capital market investments tax deferred this means that income tax will ultimately be paid on withdrawals but not until retirement age a minimum of 59 years old with required minimum distributions rmds starting at age 73 34the idea is that employees earn more money and thus are subject to a higher tax bracket as full time workers and will have a lower tax bracket when they are retired furthermore the income earned inside the account is not subject to taxes until the account holder withdraws it if it s withdrawn before age 59 a 10 penalty will apply unless exceptions are met 5advantages of participating in a dc plancontributions made to a dc plan may be tax deferred until withdrawals are made in the roth 401 k the account holder makes contributions after taxes but withdrawals are tax free if certain qualifications are met 6 the tax advantaged status of dc plans generally allows balances to grow larger over time compared to accounts that are taxed every year such as the income on investments held in brokerage accounts on march 29 2022 the u s house of representatives approved the securing a strong retirement act of 2022 also known as secure act 2 0 which is designed to help people build enough funds from dc plans for retirement key provisions include mandatory automatic enrollment a later starting age for rmds increased catch up contributions and a green light for matching contributions to be paid into roth 401 k s and on student loan payments 7employer sponsored dc plans may also receive matching contributions the most common employer matching contribution is 0 50 per 1 contributed up to a specified percentage but some companies match contributions dollar for dollar up to a percentage of an employee s salary generally 4 to 6 if your employer offers matching on your contributions it is best to contribute at least the maximum amount they will match as this is essentially free money that will grow over time and will benefit you in retirement other features of dc plans include automatic participant enrollment automatic contribution increases hardship withdrawals loan provisions and catch up contributions for employees aged 50 and older 8limitations of dc plansdc plans like a 401 k account require employees to invest and manage their own money to save up enough for retirement income later in life employees may not be financially savvy or have any other experience investing in stocks bonds and other asset classes this means that some people may invest in improperly managed portfolios for instance a portfolio that includes too high of a ratio of their own company s stock rather than a well diversified portfolio of various asset class indices unlike defined benefit db pension plans which are professionally managed and guarantee retirement income for life from the employer as an annuity dc plans have no such guarantees many workers even if they have a well diversified portfolio are not putting enough away regularly and will find that they do not have enough funds to last through retirement the average american retirement savings balance across all age groups according to vanguard s latest annual study of savings in the u s 9dc plan examplesthe 401 k is perhaps most synonymous with the dc plan but many other options exist the 401 k plan is available to the employees of publicly owned companies 10 the 403 b plan is typically open to employees of nonprofit corporations such as schools 11notably 457 plans are available to employees of certain types of nonprofit businesses as well as state and municipal employees the thrift savings plan tsp is used for federal government employees while 529 plans are used to fund a child s college education since individual retirement accounts iras often entail defined contributions into tax advantaged accounts with no concrete benefits they could also be considered a dc plan 