Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Which of the following is a characteristic of defined contribution retirement plans?

1. Benefits are predetermined

2. Investment risk is borne by the employer

3. Contributions are usually based on employee salary

4. They provide a guaranteed return on investment

The correct answer is: Contributions are usually based on employee salary

Defined contribution retirement plans are structured in a way where employees (and sometimes employers) contribute a specific amount or percentage of the employee's salary to the retirement plan, which may be invested in various instruments like stocks, bonds, or mutual funds. The contributions can vary based on the employee's earnings, which is a key characteristic of these plans. As contributions are linked to the employee's salary, this creates a direct relationship between the amount contributed and the employee's earning potential, enabling individuals to increase their retirement savings in accordance with their income growth over time. The funds in the plan grow based on the investment performance, and employees typically have the flexibility to choose how to invest their contributions among the available options. While other aspects of defined contribution plans are important (such as the fact that risks associated with investment performance rest primarily with the employee, not the employer), the defining characteristic regarding contributions specifically relates to their correlation with employee salary.