FinanceFirst financial glossary
What is Pension?
A direct definition, followed by examples, comparisons, related concepts, and the sources that support the explanation.
Written by Asim Ahmad, Founder and Editor, FinanceFirst
Definition
In one sentence about Pension
A pension is an employer- or union-sponsored retirement plan that provides retirement income. A traditional pension is a defined benefit plan that promises a benefit calculated under the plan’s formula, while the word pension can also refer more broadly to employer retirement plans.
How a Traditional Pension Works
A defined benefit plan promises a benefit under a formula that may use pay, years of service, age, and other plan terms. The employer generally bears the plan’s investment risk. The benefit can be expressed as a lifetime monthly amount or another payment form allowed by the plan.
How It Differs From a 401(k)
A defined contribution plan places contributions in an individual account, and the eventual value depends on contributions, investment gains or losses, and fees. A traditional defined benefit pension instead focuses on the promised formula benefit rather than an individual account balance.
Vesting and Accrued Benefits
Vesting determines when a participant has a nonforfeitable right to the employer-funded benefit. The accrued benefit is the amount earned under the formula at a point in time. Leaving a job can stop future accruals even when the benefit already earned is vested.
What to Check
Review the Summary Plan Description, benefit statement, vesting status, credited service, pay history, beneficiary rules, early-retirement reductions, survivor options, payment forms, and plan contact information. Private defined benefit plans may have federal pension insurance subject to legal limits and exclusions.
Side-by-side
Defined Benefit vs. Defined Contribution
| Feature | Defined Benefit Pension | Defined Contribution Plan |
|---|---|---|
| Benefit | Plan-formula benefit | Account balance |
| Investment risk | Generally borne by plan sponsor | Generally borne by participant |
| Example | Traditional pension | 401(k) |
A traditional pension is defined by the plan formula, vesting, service history, and payment options. The benefit statement and formal plan documents control the actual amount and choices.
Put the concept in context
Tools and guides for the next question
Common questions
Frequently asked questions
Is a pension the same as a 401(k)?
A traditional pension is a defined benefit plan with a formula benefit. A 401(k) is a defined contribution plan whose value depends on contributions, investment results, and fees.
Can a vested pension still stop growing?
Yes. Vested means the earned benefit is nonforfeitable under the plan’s rules; it does not necessarily mean additional service or pay credits continue after employment ends.
Are all pensions insured by PBGC?
No. PBGC covers most private-sector defined benefit plans, subject to legal rules and limits. Government plans, some church plans, defined contribution plans, and other arrangements may not be covered.
Evidence you can inspect
Sources and further reading
Use these links to check the underlying definition, rule, dataset, or consumer guidance. External pages can change after publication.