Massachusetts State Life Insurance Practice Exam

A "defined contribution" plan is characterized by the fact that the contributions made to the plan are specified, while the eventual benefit amount that retirees will receive can vary based on factors such as investment performance and the amount contributed over time. In this type of plan, both employees and employers may contribute a certain amount, but the specific retirement benefit is not guaranteed.

The reason this answer is correct is that it highlights the essential feature of defined contribution plans: while the contributions are predetermined, the retirement benefits depend largely on how well the investments within the account perform. This introduces an element of variability and risk for the employee as their retirement income is not fixed—it can fluctuate based on market conditions and investment outcomes.

Looking at the other options, the first choice describes a "defined benefit" plan, where the employer guarantees a specific payout upon retirement, regardless of contribution amounts. The third option implies an inclusive benefit structure that doesn’t accurately reflect the nature of defined contribution plans, which typically depend on the individual’s contributions and their employment tenure might impact eligibility. The last option suggests that no contributions are necessary, which does not align with defined contribution plans as they inherently involve contributions to accumulate a retirement fund.