What Is a Pension Plan? How It Works and Why It Still Matters

Feature Pension Plan 401(k) Who funds it Employer Employee + employer match Who manages investments Employer Employee Guaranteed payout Yes — lifetime income Employer bears the risk Risk level Employer bears risk Employee bears risk Flexibility Low High Tax treatment Tax-deferred Tax-deferred Years of Service x Final Average Salary x Employer Multiplier = Annual Pension Benefit Example: 30 years x $70,000 x 2% = $42,000 annual pension Key Inputs: Years of Service: The longer you work, the larger your benefit.