A pension is a type of retirement plan, somewhat similar to a 401K. Both provide you with monthly payments upon retirement, but there’s one distinct difference between the two: pensions are traditionally funded by the employer, whereas 401Ks are comprised of an employee’s contributions.
Defined Benefit Plans vs Defined Contribution Plans
When people talk about pensions, they usually refer to the concept of a defined benefit plan. Upon retirement, an employee with this type of pension receives monthly payments based on age, years worked, and salary. These payments are a fixed amount and aren’t as risky as a 401K plans because they are dependent on employer contributions made to a company investment portfolio, not the strength of investments. You’re much less likely to find this traditional form of pension plans today.
Defined contribution plans are on the rise; if you’re familiar with how 401K plans work, then you’ll understand these. Instead of the employer making regular contributions, you allot a percentage of your paycheck to go towards your retirement fund. The contributions from your paycheck are not taxed and employers usually match 50% of your contributions. Employer contributions are typically limited to no more than 6% of your salary.
Traditional Pensions are an Endangered Species
Your employer is probably going to offer a 401K plan instead of the traditional, defined benefit pension plan. These days, only 22% of Fortune 500 companies offer pension plans to new employees, and most industries have shifted away from pensions as well. Although pensions are the better option for employees, they’re troublesome for the employer. Compare a pension to a 401k: since the former is based on the employer’s contributions, they are responsible for providing payouts, even if the company falls on hard times.
Here are five industries that, for the most part, still offer pension plans to new hires:
- Insurance
- Utilities (Gas and Power)
- The military
- Energy
- Automobile
And these five industries are least likely to provide pensions to new employees:
- Retail
- Tourism
- Construction
- Aerospace
- Technology
So you don’t have a pension. Now what?
For the most part, workers of the previous generation are able to enjoy a benefit pension plan. New employees do have some options available. Highly unionized industries or careers are more likely to offer traditional pension plans, and if you are unhappy with a 401K, you could set up a deferred-income annuity contract with an insurance provider. All you need to do to start is make an initial premium payment. You’ll start receiving your monthly payments in about 10-20 years.
