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What’s a pension? How’s it Different from a 401(k)?

December 17, 2018 Updated: September 8, 2020

If you’re a 20-something juggling student-loan debt and a fast-changing economy, finding the time to think about a pension can be tough. This simple explainer shows the value of a pension and how powerful they can be.

What’s a pension? How’s it Different from a 401(k)?

One of the most common types of retirement plans in America is a 401(k). A pension is different from a 401(k) and is a form of what investment pros call a “Defined Benefit (DB)” retirement plan. A 401(k) is what’s known as a “Defined Contribution (DC)” plan.

Think about it this way: in a 401(k) the amount you put in is fixed, but the amount you take out when you retire is unknown, because you don’t know how the stock market will perform. A pension is a guaranteed sum of money that you start to receive once you retire and lasts until the day you die. It’s a guaranteed income stream that will live as long as you do.

Less Stress When You Prepare Well, No Matter How Life Goes

Pensions are Less Risky.
While no retirement tools are 100% without risk, your pension is less risky than a 401(k). Pensions aren’t as susceptible to market swings like 401(k)s.
  • Financial markets have their ups and downs, so what happens if funding levels in a pension begin to fall below sustainable levels? Well, the fund is required by law to implement a plan whereby the employer provides sufficient funds to get it back on track. That way you can focus on all those retirement plans you and your family are excited about, and not on managing your money.
Experts Have Your Back.
It helps that pension plans are professionally managed so you have experts managing those deferred wages.
  • A portion of your benefits is also currently insured by the Pension Benefits Guarantee Corporation (PBGC), a U.S. Government Agency. Although this provides an important stopgap, we view the PBGC only as an insurer of last resort, since full benefit levels might not be maintained if the fund were ever to be referred to the PBGC.
  • Additionally, just like how you and your coworkers are stronger together in your union, your retirement savings can be used to make a real difference. Pension funds often use their investments to make companies stronger, smarter and more ethical.
Your 401(k) Isn’t a Predictable Stand In for Pre-Retirement Wages.

Often there are waiting periods for receiving company contributions to a 401(k) plan. In some of our industries where turnover is high, that leaves Gen Z’ers and millennials who are just getting started with their professional careers locked out of the opportunity to build for retirement.

  • If you leave your job before the vesting period ends, you may receive no benefits at all.
  • Poor investment returns could considerably lower your retirement account and significantly decrease your ability to sufficiently fund your retirement.
  • Unlike a pension plan, a 401(k) does not offer lifetime benefits, and your money may run out before you die. If you want a lifetime benefit from your 401(k) plan it will be costly. To receive a lifetime benefit you would need to buy it from an insurance company, which has overhead expenses and a markup for profit.
  • You can make mistakes. While we know you’re smart, you have a lot of things to manage already in life. With a 401(k), you have manage your own savings and if you make a mistaken investment, the results could be catastrophic.

To put it simply, here’s why a pension is such a valuable thing to have:

Safe and Guaranteed.

With a pension, you don’t have to stress about stock market turmoil and can plan accordingly for your retirement. Benefits are guaranteed (up to specified limits) by the Pension Benefit Guaranty Corporation, a federal agency that oversees the health of our pensions.

Lifetime Benefits.

A pension ensures you will receive income from the day you retire until the day you die. It’s a paycheck for the rest of your life.

Less Stress.

A pension is professionally managed and, on average, investment fees are lower than a 401(k) or an IRA. You won’t have to manage and rebalance your portfolio on your own.

The UFCW is dedicated to helping people build better lives – at all stages of life. Fighting for sustainable pensions is one way our union family ensures that hard-working people earn the dignity and respect they should get, no matter how young, old, or in-between folks may be.

More Helpful Resources For You To Check Out:

We just learned a lot about why pensions are better than 401(k)s. Spend some time figuring out how much you should save for retirement. AARP has a great retirement calculator you can use!

Aging in America is expensive and full of unpredictable costs – whether its medical bills, or other surprises life throws your way. It adds up. So, let’s get you prepared and empowered to build a better life – well into your Golden Years.

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