Certified Plan Sponsor Professional (CPSP) Practice Exam

How are Defined Contribution plans primarily funded?

1. Employer and employee contributions

2. Only by employer contributions

3. Investment gains only

4. Through government grants

The correct answer is: Employer and employee contributions

Defined Contribution plans are primarily funded through contributions made by both the employer and the employee. In these plans, the amount contributed to each individual's account is defined, and both parties typically have the opportunity to make contributions. Employers often provide a matching contribution, encouraging employees to save for retirement. Employees can also choose to make their own contributions, often through payroll deductions. This dual approach facilitates the growth of retirement savings, allowing individuals to accumulate a retirement fund over time based on contributions and investment performance. The other funding sources listed, such as investment gains or government grants, do not represent the primary funding mechanism for Defined Contribution plans. Investment gains may enhance the account balance but are not a direct source of funding, while government grants are not a standard means of funding these plans.