How Does a Pension Plan Work?


Retirement is a glorious time of life most people look forward to with excitement, especially if they’ve planned well for those future golden years by tucking away a nice retirement fund to help them live comfortably. For most employees in the private sector, that means setting up a 401(k) or some other type of retirement account they can contribute part of their paycheck to each month. For those in the public sector, pension plans that consist exclusively of employer contributions are much more common. 

Historically, pension plans first became popular in World War II, and they have remained key benefit components for government employees and unionized workers since that time, although some private companies also have pension plans. Businesses who use them agree to pay their employees set benefit amounts throughout their retirement years. The exact amount you can expect to receive increases each year that you work for the company. To make the details even more confusing, some plans have evolved to also include employee participation. Here’s a quick look at how a pension plan works.