Pension Plan

AAA

DEFINITION of 'Pension Plan'

A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee's future benefit. The pool of funds is then invested on the employee's behalf, allowing the employee to receive benefits upon retirement.

INVESTOPEDIA EXPLAINS 'Pension Plan'

In many ways, a pension plan is a method in which an employee transfers part of his or her current income stream toward retirement income. There are two main types of pension plans: defined-benefit plans and defined-contribution plans.

In a defined-benefit plan, the employer guarantees that the employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool.

In a defined-contribution plan the employer makes predefined contributions for the employee, but the final amount of benefit received by the employee depends on the investment's performance.

RELATED TERMS
  1. Social Security Trust Fund

    An account used by the United States federal government to record ...
  2. Golden Boot

    An inducement or incentive for an older worker to "voluntarily" ...
  3. Pension Shortfall

    A situation in which a company offering employees a defined benefit ...
  4. Funding Agreement

    A low-risk, fixed-income investment. A funding agreement offers ...
  5. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
  6. Canada Pension Plan - CPP

    One of three levels of Canada's retirement income system, which ...
RELATED FAQS
  1. What are qualified retirement plan types?

    A qualified retirement plan is simply a plan that meets the requirements set out in Section 401(a) of the U.S. tax code. ... Read Full Answer >>
  2. Who bears the investment risk in 401(k) plans?

    Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad ... Read Full Answer >>
  3. How do I "vest" something?

    Vesting is a term usually related to pension plans that some employer's provide to their employees.An employer may make ... Read Full Answer >>
  4. Why should investors research the C-suite executives of a company?

    C-suite executives are essential for creating and enacting overall firm strategy and are therefore an important aspect of ... Read Full Answer >>
  5. How does a pension income drawdown work?

    While there are similar drawdown plans in the United States, a pension income drawdown plan most commonly refers to a specific ... Read Full Answer >>
  6. What is the difference between a direct and an indirect distribution channel?

    A direct distribution channel is organized and managed by the firm itself. An indirect distribution channel relies on intermediaries ... Read Full Answer >>
Related Articles
  1. Retirement

    An Overview Of The Pension Benefit Guaranty Corporation (PBGC)

    Find out how this "retirement lifeguard" can save drowning plans, and why it's unlikely to be a long-term solution to the pension problem.
  2. Retirement

    Keeping Track Of Retirement Plan Assets

    Maintain records of your pension benefits or risk losing them.
  3. Retirement

    5 Tax(ing) Retirement Mistakes

    Don't let these simple errors take the luster off your golden years.
  4. Retirement

    Overcome The Retirement "Gender Gap"

    Learn why many women's post-work saving plans fall behind and what they can do to catch up.
  5. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  6. Retirement

    Will Your Retirement Income Be Enough?

    Find out how to determine whether you're on the path to a comfortable retirement, or financial ruin.
  7. Retirement

    Preparing To Tap Into Retirement Income

    You need to plan ahead to ensure a long and happy future away from the daily grind.
  8. Options & Futures

    10 Simple Steps To Financial Security Before 30

    Find out how to reach your long-term goals without becoming a tightwad.
  9. Options & Futures

    Variable Annuities: The Do-It-Yourself Pension Plan

    Variable annuities can cost more than mutual funds, but that might be worth the protection they can add to your retirement.
  10. Retirement

    Lump Sum Versus Regular Pension Payments

    If you're about to retire, you may be facing this dilemma soon. Find out what your options are.

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center