A defined benefit plan promises you a specified monthly benefit at retirement. The benefit may be a fixed dollar amount or may depend on a plan formula that considers factors such as salary and years of service. Defined benefit plans also are known as pension plans. Employers sponsor defined benefit plans and typically hire investment managers to make investment choices. The employer shoulders the investment risks.

A defined contribution plan, such as a 401(k) plan, does not promise you a specific payment upon retirement. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a set rate, such as 5% of your annual salary. In a defined contribution plan, the employee shoulders the investment risks, and the value of the account will fluctuate due to changes in the value of the investments. Upon retirement, you receive the balance in your account, which depends on contributions plus or minus investment gains or losses.