Certified Plan Sponsor Professional (CPSP) Practice Exam

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Which of the following accurately describes a Defined Contribution Plan?

It provides a specified benefit at retirement
It does not guarantee any specific benefit at retirement
It requires participants to contribute a minimum amount
It accumulates over participant's lifetime regardless of contributions

The correct answer is: It does not guarantee any specific benefit at retirement

The choice that accurately describes a Defined Contribution Plan is that it does not guarantee any specific benefit at retirement. In a Defined Contribution Plan, the retirement benefits that participants will receive are based on the contributions made to the plan and the investment performance of those contributions over time. This means that the final retirement benefit can vary significantly, depending on factors such as investment choices and market conditions. Unlike Defined Benefit Plans, which promise a specific payout upon retirement based on a formula involving salary and years of service, Defined Contribution Plans do not provide a predetermined amount. The account balance at retirement is unknown until the actual time of withdrawal, making it essential for participants to consider their investment strategies and saving behaviors throughout their working lives. This uncertainty in benefits distinguishes Defined Contribution Plans from other retirement options and emphasizes the importance of personal responsibility in managing retirement savings.