401(k) Vs Pension Plans: What’s Left for Retirees Today?

Retirement planning is one of the most important financial tasks you can undertake. The retirement landscape in the US has evolved significantly in the last few decades, especially with the decline of pension plans and the rise of 401(k) plans. As baby boomers approach retirement age, younger generations can decide whether to rely on 401(k) plans or find other ways to prepare for retirement.

With more Americans becoming self-employed or working in jobs that no longer offer pension plans, understanding the differences between these plans is essential. As we shift away from traditional retirement systems, weighing the benefits and challenges of both options is crucial. 401(k) vs. pension plans: What’s the better option? Read this blog to learn more.

401(k) Vs Pension Plans: The Future of Retirement

While 401(k) plans have become the primary retirement vehicle for many employees in the US, pension plans still provide financial security for a shrinking number of retirees. Each plan offers advantages and disadvantages; understanding them will enable you to decide your future. This blog will dive into their differences, outline their pros and cons, and help you understand how today’s retirees navigate.

What is a 401(k)?

The 401(k) Plan Explained

A 401(k) is an employer-sponsored retirement savings plan in which employees and employers can contribute to an individual account that grows tax-deferred. The contributions are made before taxes, which allows for a larger taxable income in the present. Employees can contribute a percentage of their income, and employers may offer matching contributions.

• Contribution Limits: In 2025, the employee contribution limit is $22,500, with the catch-up contribution for those over 50 being $7,500. This gives individuals the potential to contribute more as they approach retirement age.
• Employer Matching: Employers typically match a percentage of employee contributions, often up to 5-6% of the employee’s salary. This matching is essentially free money and can significantly increase your retirement savings.

How Does a 401(k) Work?

1. Employee Contributions: Employees can choose the amount they wish to contribute, up to the annual limit. The money grows tax-deferred, meaning you don’t pay taxes until you begin withdrawing funds in retirement. Some employers also allow employees to contribute after-tax money into a Roth 401(k).
2. Employer Contributions: Many employers will match employee contributions, up to a certain percentage of the salary. This matching is a great benefit and incentivizes employees to contribute more toward their retirement savings.
3. Investment Options: The plan allows employees to choose from mutual funds, ETFs, and stocks. The performance of these investments will determine the future value of the account.

What is a Pension Plan?

The Pension Plan Explained

A pension plan, or defined benefit plan, provides guaranteed monthly income to employees after retirement, based on factors like salary and years of service. Unlike a 401(k), where employees have more control over their contributions and investments, pension plans are funded entirely by the employer. These plans have become less common in recent decades but are still offered by some large corporations and public-sector jobs.

• Employer Contributions: Employers are solely responsible for funding the pension plan. The amount employees receive in retirement is determined based on the employee’s salary and years of service.
• Fixed Monthly Payments: Employees are guaranteed a set monthly payment during retirement, often for life, which provides financial security and peace of mind. Pensions are generally not subject to market performance, making them a low-risk option for retirees.

How Does a Pension Plan Work?

1. Employee Eligibility: Employees must meet vesting requirements to qualify for pension benefits. They must have worked for the company for several years before becoming eligible.
2. Monthly Payments: Once an employee retires, they begin receiving monthly payments from the pension plan. The amount depends on the pre-established formula, which often includes salary and years of service.
3. Fixed Benefits: The benefit is guaranteed for life, which makes it easier for retirees to budget and plan for the future.

401(k) vs. Pension Plans: Key Differences

1. Contribution Source

• 401(k): Contributions are made by both the employee and the employer, but the employee generally has the primary responsibility to make regular contributions. Employees have control over how much they contribute, and employers often provide matching contributions.
• Pension Plans: The employer fully funds the pension plan. Employees don’t make contributions but are guaranteed a fixed monthly income upon retirement, based on the company’s pension formula.

2. Investment Risk

• 401(k): In a 401(k), the investment risk is assumed by the employee. The future value of the plan is subject to market fluctuations, meaning employees could experience gains or losses depending on the performance of the investments they select.
• Pension Plans: The employer assumes the investment risk in a pension plan. Employees receive a guaranteed monthly payout, regardless of how well or poorly the investments perform.

3. Retirement Benefits

• 401(k): The value of a 401(k) depends on the amount contributed and the performance of the investments. The retirement benefit is not guaranteed, and it’s possible to have a lower payout if the investments do poorly.
• Pension Plans: Pension plans offer a guaranteed monthly payout for life, based on a formula that typically includes salary and years of service. This makes pension plans more predictable and secure for retirees.

4. Portability

• 401(k): A significant advantage of a 401(k) is that it is portable. If you change jobs, you can roll over your 401(k) to your new employer’s plan or into an IRA, ensuring that your retirement savings continue to grow.
• Pension Plans: Pension plans are not portable. You may forfeit your pension benefits if you leave your job before fully vested. Even if you are vested, you are tied to the employer providing the pension plan.

The Decline of Pension Plans in America

The Changing Retirement Landscape

As of 2025, only about 20% of private-sector employees have access to pension plans, with most employers offering 401(k) plans instead. The shift from pension plans began in the 1980s as companies sought to reduce their long-term financial liabilities. Pension plans required companies to maintain fund reserves to cover future obligations, making them costly and difficult to manage.

Many businesses now prefer the 401(k) model because it transfers the employee’s responsibility of saving for retirement. With pensions, the employer assumes the risk of investment performance, while 401(k) plans allow employees to control their investments but bear the risk.

Public vs. Private Sector Pensions

While pension plans have largely disappeared in the private sector, they remain common in the public sector and among unionized employees. Government employees and teachers, for example, may still have access to traditional pension benefits that provide a stable income during retirement.

• Public Sector: Many government workers still enjoy defined benefit pension plans, which provide a guaranteed income for life. This system is highly beneficial but remains increasingly rare in the private sector.
• Private Sector: In contrast, the majority of private-sector employees must rely on 401(k) plans, which require personal responsibility for retirement savings.

Pain Points in Retirement Planning Today

1. Inadequate Savings

A significant pain point for many Americans is the lack of retirement savings. According to the US Federal Reserve, 40% of adults have no retirement savings, and even more individuals have less than the amount needed to maintain their standard of living in retirement.

Social Security: Many workers rely on Social Security as their primary source of income after retirement. However, Social Security benefits alone are often insufficient to cover basic expenses, leaving many retirees financially vulnerable.

2. Investment Risks with 401(k) Plans

While 401(k) plans offer greater flexibility regarding investment options, they also come with inherent risks. The market volatility of stocks, bonds, and mutual funds means that employees’ retirement savings are subject to significant fluctuations. Many employees may feel unprepared to make investment decisions, which can lead to losses in their retirement accounts.

3. Reduced Pension Availability

With pension plans becoming increasingly rare, many employees are left without guaranteed income upon retirement. The shift toward 401(k) plans has created more uncertainty about retirement security, especially for those who have not been able to save adequately throughout their careers.

Choosing the Right Plan for Your Future

1. Assess Your Retirement Timeline and Goals

If you’re still several decades away from retirement, you may benefit from the growth potential offered by a 401(k), especially if you are comfortable with investment risks. However, a pension plan may offer more security with guaranteed income if you’re nearing retirement.

2. Maximize Contributions to Your 401(k)

If you can access a 401(k), try contributing as much as possible, especially if your employer offers matching contributions. The more you contribute, the more you can take advantage of tax-deferred growth and the matching contributions to boost your savings.

Table: SEP IRA vs. 401(k) vs. Pension Plans

Feature	SEP IRA	401(k)	Pension Plan
Eligibility	Self-employed, small business owners, employees of tax-exempt organizations	Employees of private-sector companies	Employees of public-sector or large private-sector companies
Contribution Limits	$66,000 (under 50), $30,000 (50 and above)	$22,500 (under 50), $30,000 (50 and above)	Employer-funded, no employee contributions
Employer Contributions	Yes, mandatory employer contributions	Yes, employer matching available	Yes, employer-funded
Employee Contributions	No employee contributions	Yes, employees can contribute	No employee contributions
Investment Options	Limited (mutual funds, annuities)	Broad range (stocks, bonds, mutual funds, ETFs)	Limited, usually managed by employer
Investment Risk	Employee assumes investment risk	Employee assumes investment risk	Employer assumes investment risk
Tax Treatment	Pre-tax contributions, tax-deferred growth	Pre-tax contributions, tax-deferred growth	Tax-deferred contributions, guaranteed benefits
Portability	Highly portable, can be rolled over	Highly portable, can be rolled over	Not portable, benefits are tied to employer
Payouts	Withdrawals based on accumulated savings	Withdrawals based on accumulated savings	Fixed monthly benefit based on salary & tenure

How Beem Can Help You Achieve Financial Stability

While retirement savings are crucial, managing short-term financial needs is equally important. Beem offers a range of financial tools that help you manage daily spending and long-term goals like retirement savings. Whether you’re contributing to a 401(k), paying off debt, or building an emergency fund, Beem can guide you.

Tools like Beem can help ensure that your emergency expenses don’t derail your long-term goals. Combining thoughtful retirement planning with good financial habits is the best way to ensure a secure and comfortable retirement.

Conclusion

The choice between a 401(k) and a pension plan is significant, and your decision should be based on your financial situation, your long-term goals, and the type of retirement lifestyle you envision. While 401(k) plans offer more flexibility and the potential for greater growth, pension plans provide guaranteed income and security in retirement. With both options, it’s crucial to understand your plan, maximize your contributions, and consider how it aligns with your overall financial strategy.

Remember that your retirement savings are just one part of your financial well-being. With Beem’s budgeting tools, you can track your income, set up savings goals, and make smarter financial decisions to ensure you’re working toward a secure future. In addition, Beem’s Everdraft™ lets you withdraw up to $1,000 instantly and with no checks. Download the app here.

FAQs on 401(k) Vs Pension Plans