ABA Family Legal Guide

The Rights of Older Americans

Pensions

Traditional Pension Plans

What are the different types of traditional pension plans?

There are two major kinds, and they are quite different. One kind, called a defined benefit plan, guarantees you a certain amount of benefits per month upon retirement. For example, a defined benefit plan might pay you $10 a month per year of service. Under that plan, a person who retires after ten years of service would receive $100 per month in pension benefits.

Under the other kind of plan, called a defined contribution plan, the employer and/or the employee contribute a certain amount per month during the years of employment. The amount of the benefit depends on the total amount accumulated in the pension fund at the time of retirement. And that amount depends not only on how much you and your employer contributed, but also on how much that money earned when it was invested.

Typically, pension trustees invest the fund's money in stocks, real estate, and other generally safe investments. If those investments do well over the years, the fund grows and your monthly benefits may be relatively high. But if the investments do poorly, the fund may not grow much or may even shrink. In that case, your monthly benefits may be far smaller. (See the discussion later in this section of the requirement that plans make prudent investments.)

Even in the defined contribution plan, your benefit will be determined by some formula that takes into account your age, how long you worked for the employer, and how much you were paid.

The choice of defined benefit or defined contribution plan is not yours to make. The employer decides.