A 401(k) plan is a type of:

Question

Accepted Answer

Defined contribution retirement plan. A 401(k) plan is a defined contribution retirement plan in which employees contribute a portion of their pretax salary to an individual retirement account, often with an employer match. The employee's retirement benefit depends on the amount contributed and the investment performance of those contributions over time. The employee bears the investment risk, and the final balance at retirement is not predetermined.

A defined benefit retirement plan (traditional pension) promises a specific retirement benefit based on a formula typically involving salary and years of service, with the employer bearing the investment risk - this is fundamentally different from a 401(k). A health savings account (HSA) is a tax-advantaged account for medical expenses used in conjunction with high-deductible health plans, not a retirement savings vehicle. Workers' compensation insurance provides benefits to employees who suffer job-related injuries or illnesses, which is an entirely different type of employee benefit.

The distinction between defined benefit and defined contribution retirement plans is a key benefits concept on the DSST Human Resource Management exam. Students should understand that defined contribution plans like 401(k)s have largely replaced traditional pensions in the private sector, shifting investment risk from employers to employees while offering greater portability and employee control.

DSST Human Resource Management: Question of the Day

Get a free DSST Human Resource Management question every day

Ready for the full DSST Human Resource Management? Earn 3 college credits.