Wise Certification Practice Test

In a defined-contribution pension plan, upon retirement, the employee receives the total amount of money contributed plus investment earnings. This type of plan works based on individual accounts where both the employee and sometimes the employer make contributions to the employee's account. The contributions are then invested, and the account's balance grows based on investment performance over time.

As the retirement date approaches, the total value of the account reflects all contributions made, along with any gains or losses from the investments chosen by the employee. This means that the retirement benefit is directly tied to the amount contributed and the investment growth achieved, rather than a pre-established payout structure.

In contrast to defined-benefit plans, where retirees often receive a fixed monthly payment based on salary and years of service, defined-contribution plans offer flexibility in how the retiree may withdraw funds or in how those funds are utilized after retirement. Therefore, focusing on the total account value and the performance of investments correctly captures the essence of how defined-contribution plans operate.