What is the Difference Between Pension Plan and Retirement Plan?

The main difference between a pension plan and a retirement plan (such as a 401(k)) lies in who funds and controls the plan, as well as the type of benefits provided. Here are the key differences:

Funding and Control: A pension plan (also known as a defined benefit plan) is funded and controlled by the employer, while a 401(k) (defined contribution plan) is primarily funded by the employee, who may choose how the money is invested.
Guaranteed Benefits: Pension plans guarantee a monthly check in retirement, based on a formula that includes factors such as salary, age, and years of service at the company. On the other hand, 401(k) plans do not offer guarantees, as the final benefit depends on the investment performance and the amount contributed.
Portability: 401(k) plans are portable, meaning you can roll them over into another account if you change employers one or multiple times. Pension plans may only be available if you stay with the company through retirement.
Risk: Pension plans are less risky for the employee, as the employer assumes the risk of ensuring the necessary funds are available for payouts in retirement. With a 401(k), the burden of saving and investing for retirement is on the employee, along with the associated risks.

In summary, pension plans offer more security and guaranteed benefits, while retirement plans like 401(k)s provide more control over investment choices and flexibility in the event of job changes. However, 401(k)s involve more risk and responsibility for the employee compared to pension plans.