Defined contribution plans provide business owners and employees the opportunity to take charge of their own retirement. They offer flexibility to choose how much to contribute toward retirement and how the money is invested. The final benefit at retirement depends on those accumulated contributions and the investment returns through those years.
These plans differ from defined benefit plans which require annual funding by the employer and specify the benefit in terms of the payment received at retirement based on salary and years of service. Defined contribution plans include SEPs, profit sharing plans and 401(k) plans.