What type of pension plan involves the company funding a plan where employees benefit from gains but also bear the risk of losses?

In a defined contribution plan, the company makes contributions to individual employee accounts, but the ultimate benefits employees receive depend on the performance of the investments made with those contributions. Employees essentially own their accounts and are directly affected by any gains or losses that occur, which can fluctuate based on market performance. This contrasts with a defined benefit plan, where the employer guarantees a specific payout at retirement, regardless of investment performance, shifting the investment risk away from the employee.

In defined contribution plans, such as 401(k) plans, employees often have the option to choose how their funds are invested, be it in stocks, bonds, mutual funds, or other investment vehicles. This choice empowers employees but also exposes them to the inherent risks associated with these market options. Therefore, any increases or decreases in their retirement savings are a direct reflection of their investment choices and market conditions, making this a suitable description based on the question about employee risk and gains.

Understanding this distinction helps clarify how different pension plans allocate both risks and rewards between the employer and employee.