What is a pension?

A pension (defined benefit plan) is an employer-funded retirement plan that pays you a guaranteed monthly income for life after you retire. Unlike a 401(k), the employer bears the investment risk — your benefit is calculated by a formula based on salary and years of service.

A pension — formally called a defined benefit (DB) plan — is a retirement plan where your employer promises to pay you a specific monthly benefit for life starting at retirement. The employer contributes to the plan, manages the investments, and bears the risk if the investments underperform. Your benefit is not tied to investment returns; it's determined by a formula.

How pension benefits are calculated

Most pension formulas combine three variables: years of service, final average salary (often the average of your last 3–5 years), and a benefit multiplier (commonly 1%–2.5% per year of service). Example: 30 years of service × 1.5% multiplier × $80,000 final average salary = $36,000 per year ($3,000/month). The specific formula varies by employer and plan document. The Department of Labor's guide to defined benefit plans covers the rules employers must follow.

Vesting: when the benefit is actually yours

You don't automatically own your pension the moment you're hired. Vesting is the process by which you earn a non-forfeitable right to your benefit. Under federal law (ERISA), private-sector pension plans must use one of two vesting schedules: cliff vesting (full vesting after no more than 5 years) or graded vesting (gradually over 3–7 years). Government and church plans may follow different rules. ERISA sets the minimum standards for private-sector plans.

Pensions vs. 401(k) plans

With a 401(k), you contribute your own money, choose your investments, and bear the investment risk — your balance at retirement depends on what you save and how the market performs. With a pension, the employer funds the plan and you receive a guaranteed amount regardless of market conditions. Pensions are increasingly rare in the private sector — most common today in government, military, and some union jobs. The Department of Labor's retirement plan resources explain both structures.

Defined benefit plan: employer funds it, you receive a guaranteed monthly income for life.
Benefit formula: years of service × salary × multiplier — not tied to investment returns.
Vesting determines when the benefit is fully yours — typically 5–7 years under ERISA minimums.
Survivor benefit options let a spouse continue receiving payments after your death (often at reduced amounts).
Private-sector pensions are rare; most common in government, military, and some union jobs.

What the regulators say

ERISA (the Employee Retirement Income Security Act) sets minimum standards for pension plans in private industry, including vesting schedules, funding requirements, and fiduciary responsibilities. — U.S. Department of Labor
A defined benefit plan promises a specified monthly benefit at retirement, often calculated through a formula based on salary and years of service. — U.S. Department of Labor
Many private-sector defined benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC), which pays benefits up to legal limits if a covered plan fails. — U.S. Department of Labor

Key takeaways

A pension guarantees a set monthly income for life — you don't manage investments or bear market risk.
Your benefit is calculated by a formula: years of service, salary, and a multiplier set by your employer.
Vesting schedules determine when the benefit is truly yours — leaving before you're fully vested can mean forfeiting part of your benefit.
Pensions are now rare in the private sector; most common in government, military, and union workplaces.
The PBGC insures most private-sector pensions up to federal limits if the plan sponsor fails.