Certified Plan Sponsor Professional (CPSP) Practice Exam

Which characteristic is unique to defined contribution plans compared to defined benefit plans?

1. Guaranteed retirement income

2. Predictable funding requirements

3. Fixed benefit payouts

4. Employer manages investment risks

The correct answer is: Predictable funding requirements

Defined contribution plans are distinct in that they do not promise a specific amount of benefits at retirement. Instead, individuals receive benefits that depend on the contributions made and the performance of the investments chosen within the plan. This characteristic highlights a key difference: unlike defined benefit plans, where employers bear the risk of funding and investment performance to deliver guaranteed retirement income, defined contribution plans place the onus of investment risk on the employee. Employees must make decisions on how much to contribute, how to allocate those contributions among investment options, and they ultimately receive the retirement income based on those choices and market performance. The predictable funding requirements mentioned relate more to defined benefit plans, where contributions must often be made at levels set by actuarial calculations to ensure future benefits are guaranteed. In defined contribution plans, while employers may match contributions, the overall financial obligation isn’t predetermined in the same structured way and can vary significantly based on participant contributions and investment outcomes. As such, the nature of the funding and its predictability differs greatly between these two types of plans.