A defined contribution pension plan is a retirement plan funded by an employee, with potential matching contributions from the employer up to a certain amount. With a DCPP, the employee specifies how much money from each paycheck will be deposited into the plan each pay period, and the employee also directs and runs the investment choices. Rules for matching contributions from employers are specific to the exact plan put into place. In Canada, plan funds are held in a third-party trust that is separate from the company, so the company can’t use the funds in the plans. These plans are beneficial to an employee in three major ways.
- A DCPP helps the employee save for retirement and possibly receive some additional money from the matching employer contributions.
- A DCPP gives the employee more control over retirement funds, as the employee can choose how to allocate the funds (as opposed to a defined benefit pension plan).
- The deduction of the funds from each paycheck occurs pre-tax, so the DCPP lowers the employee’s overall tax liability.
From the employer perspective, defined contribution pension plans tend to be much less expensive from a dollar standpoint than defined benefit pension plans, and DCPPs also come with less regulatory and financial risk.