Updated by Richard Barrington
These days, traditional pension plans are somewhat like an endangered species -- you may have heard of them, but chances are good you've ever actually seen one.
That's because of a huge shift in recent decades from defined benefit pensions to defined contribution plans like 401(k) plans. Both have their pluses and minuses, but if you want the characteristics of a defined benefit pension, you'd better know where to look.
What is a pension plan?
A pension plan is a retirement vehicle in which an employee earns a guaranteed level of benefits throughout retirement, based on earnings and length of service.
Do pensions still exist? If so, who guarantees those benefits? Typically the employer guarantees a pension, and that's where the problem comes in. The guaranteed benefits of a pension program mean that the employer shoulders not only the cost of funding those benefits, but also the risk involved.
For example, if investments used to fund a pension plan under-perform expectations, the sponsoring employer would have to make up the shortfall. If accelerating inflation triggers higher-than-expected cost-of-living increases in benefits, the employer would have to step up contributions to the program.
Since the 1980s, more and more employers have transitioned to retirement plans that shift much of the expense and risk of funding retirement onto their employees. This newer type of plan is known as a defined contribution plan, and the most prominent example is the 401(k) plan. There are also similar plans called 403b plans that are offered by public schools and not-for-profit organizations.
Pension vs 401(k) plan
While a traditional pension plan guarantees retirement benefits, 401(k) plans allow employees to pay into the plan with a portion of their earnings. The employer may match a portion of the employee's contributions, but after that the responsibility and the risk falls to the employee. So, your benefits in a 401(k) plan depend on how much you choose to put into it over time, and how successful the investments you pick turn out to be.
Still, the advantage for employees isn't entirely on the side of traditional pensions. 401(k) plans are considered more portable for employees -- while defined benefit plans often have a length-of-service requirement that means you don't earn full rights to your benefits until you have worked for the employer for several years, generally the balances you accrue in a 401(k) plan can be rolled over into a new retirement plan if you change employers.
Also, the sense of security created by the guaranteed benefits in a traditional pension may turn out to be an illusion if the employer falls on hard times and can't deliver the promised level of benefits.
Because of their differing characteristics, if you want the freedom to make a few job moves during your career and feel comfortable making your own retirement savings decisions, a 401(k) plan may be a good fit for you. On the other hand, if you plan to stay with one employer for a long time and would prefer someone else to oversee your retirement benefits for you, you may be more comfortable with a traditional pension.
Jobs that offer pensions
If you like the idea of having a traditional pension plan, here are five tips on finding jobs that offer pensions:
- Consider government work. Eighty-six percent of workers in state and local government jobs have access to a defined benefit pension, compared with just 18 percent of workers in the private sector.
- Become a public school teacher. While access to traditional pensions is pretty high for government employees in general, it is virtually universal for public school teachers. Ninety-nine percent of primary, secondary and special education teachers in the public school system have access to a defined benefit pension.
- Join a union. Much like traditional pension plans, unions are institutions that have declined in prominence over the past few decades. However, they are still around in some sectors of the economy, and their negotiating leverage can make a difference in gaining union employees more access to pension benefits than non-union employees. Among government workers, 94 percent of union members have access to a defined benefit pension, compared with 79 percent of non-union workers. In the private sector, the difference is even more dramatic: 71 percent of union members in the private sector have access to a defined benefit plan, compared with just 13 percent of non-union workers.
- Work for a large company. While only 18 percent of all private sector workers have access to a defined benefit pension, this number jumps to 43 percent for companies of 500 employees or more.
- Settle in the Northeast. In both the private and public sectors, employees in the Northeast have slightly higher rates of access to pension plans than the national average.
Traditional pension plans may be something of an endangered species, especially in the private sector. However, you can still find them if you know where to look.