What's the difference between a 401(k) and a pension plan?

Pensions, 401(k)
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June 2017
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The pension plans are typically financed by the employers and guarantee an individual pension when the employee retires. The guaranteed pension will depend on the years of service, seniority, and earned income among other factors. Employees may or may not be required to contribute to the pension plan. The crucial element here is the guaranteed amount. The employers bear the risk of meeting their future obligations. As we have seen many times already, many employers have a shortfall in their pension plans and have to take money out of their operation to pay off pensions to their former workers.

The 401k and 403b are defined contributions plans, where both the employee and the employer make contributions. These contributions are tax deferred. They reduce taxes in the year they are made. Taxes are due upon withdrawal of funds. The main burden in these plans falls onto the worker. They are responsible for making contributions to their retirement plans. The employees are also responsible for making investment choices and choosing the asset allocation for the account. The employers do no guarantee a fixed pension. The retirement distributions are solely dependent on the contribution amounts and the performance of the funds chosen in the plan.

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