what is a pension plan

A pension plan is a retirement arrangement in which an employer commits to making regular payments to an employee after they retire. It is a type of retirement plan that provides a defined benefit to employees for life after they retire. Employers typically contribute to a pool of funds set aside to fund payments made to eligible employees after they retire. Pension plans are different from defined contribution plans, such as 401(k) plans, where employees put their own money into an employer-sponsored investment program. In a pension plan, the employer manages the investment side of funding the plan, bearing the risk of choosing investments and market fluctuations. The amount of pension usually depends on the employees tenure and salary with the employer. Pension plans are designed to provide employees with a guaranteed, defined amount of benefits when they retire, making them a safer option compared to other retirement plans, although employees typically have less control over their money and sacrifice upside earning potential. Pension plans have become less common in the private sector and have been largely replaced by defined contribution plans, but they remain common in the public sector.