Pension plans are an essential part of retirement planning, providing a steady stream of income during our golden years. However, not all pension plans are created equal. There are two main types of pension plans: defined benefit and defined contribution. It’s important to understand the differences between these plans in order to make informed decisions about our retirement savings.

Defined benefit plans, also known as traditional pension plans, are based on a formula that takes into account an employee’s salary and years of service to determine the amount of retirement benefits. This means that the employer is responsible for contributing to the pension and assuming any investment risk. On the other hand, defined contribution plans, such as 401(k)s, require employees to contribute a portion of their salary and often offer matching contributions from their employer. The employee is responsible for managing their investments and bears the risk of any market fluctuations. It’s important to carefully consider the pros and cons of each type of plan and choose the one that best fits our individual retirement needs.