Close this search box.

The Difference Between a 401(k) and a Pension

Errors in Pension Calculation

A 401(k) is a type of retirement plan, but it’s not a traditional pension plan.

A traditional pension plan has defined benefits. The beneficiary of a pension plan (and their employer) puts money each month into the pension fund. That fund grows over the years. Eventually, the employee reaches retirement age and the fund starts to make payments.

Those pension payments will be the same regardless of how well the fund has performed. If the fund hasn’t grown enough to make those payments, the employer is responsible for making up the difference.

It’s a commitment that companies are now less willing to accept. Few institutions outside the public sector now offer pensions with defined and guaranteed benefits.

Instead, they’re moving to defined contribution plans such as 401(k)s. Each month, the employee (and the company) put a set amount of money into the fund. The amount that the fund pays out on retirement will depend on the performance of the fund. If the markets haven’t performed well, the payouts may be lower than the retiree expects.

On the other hand, if the fund and the markets have performed well, the retiree could have a higher income than they anticipated.

Defined contribution plans remove the commitment from the employer and leave retirees uncertain of the amount they’ll receive when they stop working.

Chapters - 401k

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More