What Is a Pension? Defined Benefit Plans vs. 401(k)s

A pension is a retirement plan that promises a benefit under a formula. In a traditional defined benefit pension plan, the employer funds the plan and carries much of the investment and longevity risk.

A 401(k) is usually a defined contribution plan. Money goes into an individual account, and the worker's retirement result depends on contributions, investment returns, fees, withdrawals, and time.

That is the main difference between pension and 401(k) plans: a pension promises a formula-based benefit, while a 401(k) builds an account balance.

Here is the short version. A pension makes a promise. The plan sets a formula. It may pay each month for life. The plan takes on much of the work and risk.

A 401(k) builds a pot of money. You add pay to it. Your job may add more. You pick from the plan's funds. The value can rise or fall. You must then turn that pot into income.

That does not make one plan good and the other bad. The terms matter. A weak pension can have poor terms. A strong 401(k) can have low fees and a good match. Some workers have both.

Ask four plain questions. What will go in? Who bears a loss? How will cash come out? What happens when one spouse dies? Those four answers show more than the plan name.

Read the plan before you choose. Save each letter. Check your years of work. Check the pay used in the math. Ask what you lose if you leave now. Ask what your spouse would get. These facts can be worth far more than a broad rule from the web.

How a defined benefit pension plan works

A pension formula may use:

years of service;

final or career-average pay;

an accrual percentage;

retirement age; and

a chosen survivor-payment form.

Illustrative formula:

1.5% × years of service × final average pay

If someone had 30 years of service and $80,000 of final average pay, this formula would produce $36,000 a year before any early-retirement reduction or survivor adjustment.

The example is not a universal pension formula. The plan document controls vesting, pay definition, service credit, early retirement, disability, survivor options, inflation adjustments, and payment forms.

Pension vs. 401(k): who carries the risk?

Question | Defined benefit pension | 401(k) defined contribution plan
Benefit basis | Formula | Account balance
Investment decisions | Mainly plan fiduciaries | Usually the participant chooses from a menu
Investment risk | Mainly plan sponsor and plan | Mainly participant
Longevity risk | Pooled when paid as lifetime income | Participant must plan withdrawals
Portability | Plan-specific | Account can often remain or roll over
Survivor protection | Payment-form and plan rules | Beneficiary and account rules

A pension and a 401(k) assign retirement risks differently. The Department of Labor retirement-plan guide explains both designs.

Neither design is automatically better in every job. A strong, well-funded pension with a useful survivor benefit can be valuable. A low-cost 401(k) with a generous match and full portability can also be valuable.

Why pensions became less common in private industry

There is no one-cause story.

Private employers shifted toward defined contribution plans over decades as:

workers changed jobs more often;

employers sought more predictable funding and accounting;

401(k) plans grew after tax-law changes;

pension regulation and administration became more complex;

market and interest-rate changes moved pension funding needs; and

employers transferred more investment and longevity responsibility to workers.

This does not mean pensions disappeared. Public employers, unions, and some private employers still offer them. Cash balance plans are also defined benefit plans, though the benefit is expressed as a hypothetical account.

Who still has access to pensions?

In March 2025, the Bureau of Labor Statistics reported that 72% of private-industry workers had access to some retirement benefit. Access to a defined contribution plan was 70%. Access to a defined benefit plan was 14%.

Private-industry worker access from the BLS March 2025 employee-benefits release. Access is not the same as participation.

The categories can overlap because one worker may have access to both plan types.

Vesting, survivor benefits, and inflation

Vesting is the point when the earned benefit becomes nonforfeitable under plan rules.

Before leaving a job, check:

vested service;

the normal and early retirement ages;

the benefit estimate;

whether additional months or years materially change the benefit;

the spouse or survivor options;

whether a cost-of-living adjustment exists;

whether retiree health benefits are linked; and

who keeps current contact information.

A single-life pension usually pays more each month while the retiree lives but stops at death. A joint-and-survivor form pays less initially and continues a stated share to the survivor. Federal spouse-consent rules can apply.

Many private pensions do not provide an automatic inflation adjustment. A flat payment can buy less over a long retirement.

What does PBGC protect?

The Pension Benefit Guaranty Corporation insures many private-sector defined benefit plans. It does not insure every retirement plan, every employer, or every promised dollar.

PBGC coverage and guarantee limits depend on the plan type, termination date, benefit form, age, and other rules. Government pensions, church plans, 401(k)s, and some professional-service plans may be outside PBGC insurance.

Use the plan's annual funding notice and PBGC resources. Do not treat PBGC as a reason to ignore the plan's condition or benefit terms.

What to check before choosing a pension lump sum

Some plans offer a lump sum instead of monthly lifetime income.

Compare:

the monthly pension and survivor option;

the lump-sum amount and calculation date;

health and reasonable longevity range;

spouse and dependent needs;

investment skill and willingness;

fees;

inflation risk;

taxes and rollover options;

PBGC coverage; and

the value of guaranteed lifetime cash flow.

A pension decision map based on PBGC benefit guidance and plan-specific payment rules. It does not recommend one payment form.

Interest rates can change a lump-sum calculation. A deadline or one-time window can also apply. Get the plan's assumptions and compare both choices on the same after-tax and survivor basis.

Common questions

What is the pension definition in simple terms?

A pension is a retirement plan that promises a benefit under a formula, often based on pay and service. A traditional pension is a defined benefit plan.

Can you have a pension and a 401(k)?

Yes. Some employers offer both, and a worker may also have a pension from one job and a 401(k) from another.

Is a pension guaranteed?

The plan promises a benefit, but the exact protection depends on the plan, sponsor, funding, law, and PBGC coverage when applicable. Not every pension or every dollar is federally insured.

Should I take the pension lump sum?

There is no automatic answer. The monthly pension transfers investment and longevity risk to the plan. The lump sum provides control and flexibility but transfers those risks to you.

This guide is general education, not legal, tax, actuarial, or investment advice. Use the current plan document, benefit estimate, and qualified advice for a pension election.

Sources

Bureau of Labor Statistics, Employee Benefits in the United States, March 2025. Accessed July 30, 2026.

Bureau of Labor Statistics, detailed March 2025 employee-benefit tables. Accessed July 30, 2026.

U.S. Department of Labor, What You Should Know About Your Retirement Plan. Accessed July 30, 2026.

U.S. Department of Labor, retirement tools and resources. Accessed July 30, 2026.

Pension Benefit Guaranty Corporation, pension resources. Accessed July 30, 2026.

Pension Benefit Guaranty Corporation, guaranteed-benefit FAQs. Accessed July 30, 2026.

Pension Benefit Guaranty Corporation, pension insurance coverage. Accessed July 30, 2026.

Pension Benefit Guaranty Corporation, finding an unclaimed pension. Accessed July 30, 2026.

Internal Revenue Service, defined benefit plan. Accessed July 30, 2026.

Internal Revenue Service, retirement plans FAQs regarding required minimum distributions. Accessed July 30, 2026.