Are Pension Plans a “thing” anymore?

Employment & Income

Short Answer: Yes! Not as common as they used to be, but still offered by certain employers.

A pension plan, simply put, is a large account that is funded by an employer for the benefit of the employees. The account is strictly for employees to draw from after retirement. About 85% of public (government, etc) employees are invested in a retirement plan, and 15% of private employees.

The main difference between a pension and a 401(k) plans: A pension plan is almost exclusively contributed to by employers, whereas a 401(k) is primarily contributed to by the employee, with a monetary “match” by the employer.

There are two types of pension plans: Defined Benefit and Defined Contribution. Defined Benefit means that the employee is guaranteed a certain amount of money to be paid out at retirement. Defined Contribution means that the employer contributes a set amount on a regular basis, often times related to the employee’s contributions.

Pension plans date back to the 1870’s. Companies that provide a pension plan are often referred to as “plan sponsors.” Pension plans are governed by ERISA (Employee Retirement Income Security Act, founded in 1974 to protect the rights of pension plan beneficiaries, and ensure transparency from employers.)

Vesting: The amount of time an employee is required to work for a company in order to secure their rights to pension contributions.

Finn’s Fact: Pension plans, like other retirement accounts, are what is referred to as “qualified accounts.” This means that they meet certain IRS standards to receive tax advantage status, such as not being taxed at the time of withdrawls.

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