401(k) vs. Pension Plan: What’s the Difference?

401(k)s and pensions are both employer-sponsored retirement plans, but pensions are nearly extinct.

In a 401(k):

• The employee makes contributions (pre-tax) into the account
• The employer may or may not match the contribution up to a certain percent
• The employee can choose where to invest the money
• The employee assumes all the investment risk. Meaning, however their investments do by the time they retire, that’s the money they get.

In a pension plan:

• The employee and/or the employer makes contributions into an investment pool with other employees’ pension money
• The employee cannot choose how to invest the money. The employer has an investment professional that manages the portfolio.
• The employer assumes all the investment risk
• The employer guarantees a monthly payment to the employee for the rest of his life after they retire. The amount of this monthly payment is known to the employee upfront when he first joins the pension plan.