401(k) vs Pension Plan

A 401(k) plan & traditional pension plan? The distinction between a defined benefit plan and a defined contribution plan. Defined benefit plans, such as pensions, risk investment is on the plan provider & will guarantee a given amount of monthly income in retirement. Defined contribution plans, such as 401(k)s, the risk is on the employee & allows employees to choose their own retirement investments with no guaranteed minimum or maximum benefits.

There are other differences as well, including the availability of each plan. Your employer is much more likely to offer a 401(k) plan than a pension plan in its benefits package. Pensions are less popular with the rise of defined contribution plans. This is because pensions are both more expensive and more risky to employers than a 401(k) plan. A 401(k) plans also allow smaller employers, which otherwise might not have had the money to set up a pension plan, to provide retirement benefits to prospective workers.

It is much easier to move and keep contributing to 401(k) funds if you switch jobs or if your company goes through a merger. Pensions, on the other hand, are better designed for employees who stay with the same company for many years.

401(k) Plan

A 401(k) is primarily funded through employee contributions via pre-tax paycheck deductions. Contributed money can be placed into various investments, such as stocks, bonds, mutual funds, and ETFs, depending on what options are made available through the plan. It is solely up to the employee to choose which option they wish to contribute in.