Under a defined contribution pension plan, who bears the investment risk?

In a defined contribution pension plan, the employee bears the investment risk because the retirement benefits are based on the contributions made by the employer and the employee, as well as the investment performance of those contributions. This means that the value of the retirement savings can fluctuate based on the returns of the investments chosen by the employee. If the investments perform poorly, the account balance will be lower at retirement, potentially leading to insufficient funds to support the employee during retirement.

This structure contrasts sharply with defined benefit plans, where the employer takes on the responsibility of guaranteeing a certain level of benefits, thus assuming the investment risk themselves. In defined contribution plans, because the employee has the discretion to make investment choices and the outcome directly affects their retirement savings, it is crucial for them to be educated about investment risks and make informed decisions.