Chartered Retirement Planning Counselor (CRPC) Practice Exam 2025 - Free CRPC Practice Questions and Study Guide

A defined contribution plan is characterized by the fact that retirement benefits are not guaranteed. In such plans, both employees and employers make contributions to individual accounts, which are then invested. The final retirement benefit depends on the performance of these investments as well as the amount contributed over time. This means that the individual bears the investment risk; if investments perform poorly, the retirement income may be lower than expected.

In contrast, a defined benefit plan guarantees a specific monthly benefit upon retirement, based on a formula that typically considers factors such as salary and years of service. A cash balance plan is a type of defined benefit plan that also provides a guaranteed benefit based on a notional account balance, regardless of how investment returns perform. A top hat plan is a non-qualified deferred compensation plan providing benefits to a select group of management or highly compensated employees, often not guaranteeing fixed amounts like the defined contribution model.

This distinction highlights how defined contribution plans inherently carry more risk for participants, as their retirement income is effectively contingent upon investment outcomes rather than guaranteed promises by the employer.