What is the difference between a benefit pension plan and a contribution pension plan?

Question

What is the difference between a benefit pension plan and a contribution pension plan?

Answer 1

A benefit pension plan gives a predetermined retirement amount.  A fairly standard formula would be 1.5% X number of years worked X average pay for the last five years = monthly retirement check.

The contribution plan is usually a 401K with the company putting in a percentage match of your contribution.  You make the investment decision from a list of funds.  Whats in the pot when you retire is your retirement money to draw out over time.

Benefit plans are very rare anymore except for union plans, government plans and a few old line companies.  This is in part due to government pension regulations that make it difficult to fully fund plans and the expense of such plans.