A pension once was a standard benefit for a lifetime of working, but today only about 20 percent of Americans have them. Many of those are employees of local or federal government agencies, while most workers in private business now have retirement plans. The big difference is in who puts up the money. Employers fund pensions; employees put their own money into retirement plans, although often with some employer contributions.
Benefit or Contribution
A pension is a "defined benefit" program. An employer sets aside money into some investment pool that is used to pay pension benefits to retired employees, usually based on some formula of number of years worked for the company, earnings and age. A retirement plan is a "defined contribution" program in which employees contribute part of their earnings to some investment to be withdrawn at retirement with no guaranteed benefit.
Private pensions are generally protected now by the federal Pension Benefit Guaranty Corp. Companies whose pensions are underfunded, meaning they don't have enough money to guarantee all benefits, pay fees to the PBGC, which then guarantees employees their pensions. Public pensions often are underfunded, but governments guarantee those payments through taxes.
The most popular type of retirement plan is a 401(k) for private employers. Nonprofit and educational organizations offer similar plans called 403(b) and 457(b). In these programs, employees have money set aside to be invested and withdrawn after retirement age, which the Internal Revenue Service defines as age 59 1/2. Some of these defer taxes on contributions.
Other Plan Types
Employers may contribute to some defined contribution plans or may create programs like Simplified Employee Pension or Simple Incentive Match Plan for Employees, called SEP and SIMPLE, which are mainly employer-financed. Another form is an employee stock ownership plan or ESOP, in which the retirement funds are invested in a company's stock.
Pensions usually have specific retirement benefits, stated by the employer. An employer may determine eligibility for benefits and how they are paid, for instance. Retirement plans are governed by IRS regulations on withdrawals, but the amount in the fund basically determines the benefit payments. Some employers offer both defined benefit and defined contribution plans.
- Internal Revenue Service: Publication 575, Pension and Annuity Income
- Department of Labor: Types of Retirement Plans
- Department of Labor: What You Should Know About Your Retirement Plan
- All Business: Pension Plan Basics
- Bankrate.com: Can You Count on Your Pension to Be There?
- CNN Money: Ultimate Guide to Retirement
- Internal Revenue Service. "Choosing a Retirement Plan: Defined Benefit Plan." Accessed Feb. 18, 2020.
- Internal Revenue Service. "401(k) Plan Qualification Requirements." Accessed Feb. 18, 2020.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.