Pension

A retirement plan in which an employer guarantees a fixed monthly payment to employees in retirement, based on salary history and years of service.

A pension, formally called a defined benefit (DB) plan, is a retirement benefit where the employer promises a specific monthly payment in retirement. The benefit formula typically considers years of service and final average salary — for example, 1.5% × years of service × final average salary. Unlike a 401(k), the investment risk and management responsibility rest entirely with the employer. You do not manage a pension account; you receive payments based on the formula when you retire.

Traditional pensions were once the dominant form of employer-sponsored retirement benefit, particularly in government, education, and large manufacturing sectors. Over the past 40 years, most private employers have shifted from pensions to 401(k) plans, transferring investment risk to employees. Today, pensions remain common in the public sector — teachers, police, military, and government employees — but are rare in private industry. Understanding your vesting schedule and benefit formula is critical for any retirement planning tied to a pension.

Pension vesting works differently from 401(k) vesting and is consequential in ways that catch employees off guard. Many public pension systems use cliff vesting: you accrue zero pension benefit until a specific tenure threshold — often 5 to 10 years — and then become fully vested. Leave before that threshold and you may walk away with nothing beyond a refund of your own contributions, without the employer-funded portion. For public sector employees, this creates a significant commitment threshold: leaving before the vesting cliff means forfeiting the accumulated benefit, which can represent hundreds of thousands of dollars in lifetime income.

Pensions are often framed as more secure than 401(k)s because they guarantee a fixed payment — and for stable, well-funded government employers, that is generally accurate. But 'guaranteed' overstates the certainty in some situations. Private sector pensions can be terminated or frozen, and if the sponsoring employer goes bankrupt, benefits may be reduced (though the Pension Benefit Guaranty Corporation insures up to defined limits). Some public pension funds are significantly underfunded — meaning invested assets are insufficient to cover promised benefits — and employees who expect full payments may face reductions if the fund's condition worsens. The guarantee is only as strong as the entity behind it.