Money-Purchase Pension Plan*

A pension plan to which employers and employees make contributions based on a percentage of annual earnings, in accordance with the terms of the plan. Upon retirement, the total pool of capital in the member’s account can be used to purchase a lifetime annuity. The amount in each money-purchase plan member’s account will differ from one member to the next, depending on the level of contributions and investment return earned on such contributions.

Also known as a defined contribution plan.

Explained further: In a money-purchase pension plan, the risk of ensuring an adequate level of retirement income rests squarely with the employee. In comparison, with a defined benefit pension plan, the employer has an ongoing obligation to ensure the plan is adequately funded, thus spreading the plan risk between the employer and plan members over time. Employers who have established money-purchase plans for their employees are required to file Form 5500 annually.

Definition courtesy of Investopedia

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