Final answer:
The employee bears the investment risk in a defined contribution plan. These plans include 401(k)s and 403(b)s, where both employer and employee contribute, and the employee is responsible for investment choices and risks.
Step-by-step explanation:
The employee bears the investment risk and funding responsibility in a defined contribution plan. These types of plans, such as 401(k)s and 403(b)s, have largely replaced traditional defined benefit pension plans. In defined contribution plans, the employer contributes a fixed amount into the employee's retirement account on a regular basis, with employees often contributing as well. The funds are invested in a variety of investment vehicles, are tax-deferred, and portable between jobs.
With the shift from defined benefit to defined contribution plans, the inflation risks and investment decisions shift from the employer to the employee. Should the investments within the 401(k) or 403(b) generate substantial real rates of return, the retiree could potentially benefit from these earnings, mitigating the effects of inflation that traditional pensioners face.