Defined benefit vs defined contribution.

In plain English

These are the two main kinds of workplace retirement plans. A defined benefit plan, the classic pension, promises you a specific monthly payment in retirement, and the employer bears the responsibility for funding and investment results. A defined contribution plan, such as a 401(k) or 403(b), instead defines only what goes in: your contributions plus any employer match. Your final nest egg depends on how much you saved and how the investments performed, and you carry the investment risk. The shift from defined benefit to defined contribution over recent decades moved that risk from employers onto workers.

01Why it matters

Knowing which kind you have tells you who is on the hook if investments do poorly, you or your employer, and how much of your retirement security depends on your own saving and investing choices.

02The math, step by step

Under a defined benefit plan, a worker is promised, say, $2,600 a month for life no matter what markets do. Under a defined contribution plan, the same worker might contribute 10 percent of pay into a 401(k), get a partial employer match, and end up with whatever the account grew to, which could be more or less depending on returns and how much they saved.

03What this is NOT

04Receipts

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