Pension plans are retirement savings plans that provide a fixed or defined income to employees during retirement.
Pension plans are typically sponsored by employers, but they can also be offered by governments or other organizations. Pension plans are designed to help employees save and invest for retirement, often with tax advantages, and to provide a reliable income stream during retirement.
Pension plans are classified into two types: defined benefit and defined contribution. A defined benefit pension plan guarantees a specific amount of income to the employee in retirement, based on factors such as their years of service and salary.
The employer is responsible for funding the plan and managing the investments to ensure that there are sufficient funds to pay out the promised benefits. In contrast, a defined contribution pension plan, such as a 401(k), allows employees to save and invest for retirement, often with matching contributions from the employer, but the ultimate benefit depends on the performance of the investments and the employee’s contributions.
Pension plans are an important part of retirement planning for many employees, but they are becoming less common in the private sector and are often supplemented with personal savings and Social Security benefits.