Characteristics of a defined contribution plan
How a defined contribution plan works can be compared to the workings of a registered retirement savings plan (RRSP). Retirement income depends on the sums accumulated in a member's account. It also depends, among other factors, on the interest rates in effect when a life annuity is purchased or the rates applicable to a life income fund (LIF).
A high return on your pension fund's investments combined with high interest rates at the time an annuity is purchased or when your account is transferred to a life income fund (LIF) ensures a higher pension during retirement.
The plan administrator decides how to invest the assets in the plan's pension fund, unless the plan provides that members assume that function, in whole or in part.
Who assumes the risk?
The return on the pension fund's investments, good or bad, directly affects the value of members' accounts. In other words, the investment risk is assumed by the plan's members. The employer's commitment is limited to making the contributions required under the plan's provisions.
What happens at retirement?
A defined contribution plan is not usually used to "pay a retirement pension". Instead, the amount credited to the member's account is used to purchase a life annuity from an insurer or is transferred to a life income fund (LIF), from which a retirement income can be drawn.
If a member does not retirement immediately, the amount accumulated can also be transferred to a locked-in retirement account (LIRA) so that it can be used to pay a retirement income later.