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.
- What Is a 401(k)?
- How a 401k Plan Works
- 401k Contribution Limits
- The Difference Between a 401(k) and a Pension
- The Benefits of a 401k
- Four Alternative 401(k) Plans
- How Employers Should Choose a 401(k)
- What Is an Indexed Annuity?
- 5 Questions Employees Should Ask Before Choosing a 401(k)
- Contributing to Your 401(k) Plan
- Contribution Limits
- Matching Contributions
- Your Age
- How to Set Your 401(k) Contribution Targets
- Calculating Your Social Security Benefits
- What’s In Your 401k Plan?
- Track Your 401(k)
- The Present and Future Value of Your 401(k) and Why You Need to Know Them
- Rolling Over Your 401(k)
- You Don’t Have to Rollover Today
- Moving Your 401(k) to Your New Employer With a Direct Rollover
- Moving Your 401(k) to Your New Employer With a 60-Day Rollover
- Borrowing Funds from Your 401(k)
- Lend Yourself Interest-Free 401(k) Funds
- Borrowing from Your 401(k) to Buy a Home