Employer-sponsored retirement plans like 401(k)s and pensions are becoming more common. Successful savers may utilize either method to maximize employer contributions and other retirement advantages as they prepare for retirement. So what are the distinctions between these two pension programs?
Comparison between 401(k) and Pension Plans
In contrast to a pension, which is a defined-benefit plan, a 401(k) is a defined-contribution plan. There are two main types of retirement plans: defined-contribution plans, which enable both workers and employers to make contributions and investments toward retirement, and defined-benefit plans, which guarantee a certain income stream once the participant reaches retirement age.
These key distinctions define who is responsible for the investment risks, the company or the individual. Since pensions are becoming less popular, 401(k)s are being asked to fill in the gap, despite their initial intent to complement existing pension plans rather than replace them.
Sixty-six percent of private sector employees in the United States had access to defined contribution plans in March 2022, while only fifteen percent had access to defined benefit plans.
Municipal and state government workers are at another end of the spectrum. By March 2022, defined benefit plans were available to 86 percent of state and local government employees. On the other hand, just 39% of respondents said they had access to defined contribution plans.