A Pension Plan is guaranteed to a person who retires or who has a disability that no longer enables them to work.
There are two broad types of Pension Plans. These two types are defined benefit plans and defined contribution plans. There are also plans called hybrid plans which combine characteristics of both defined benefit plans and defined contribution plans.
Defined benefit Pension Plans are, by definition, any plan that does not quality as a defined contribution plan. A defined benefit Pension Plan defines a benefit for the employee upon retirement. There are many factors that go into determining the benefit such as the amount of pay the employee receives, their age upon retirement, their years of employment with the company, and others.
Defined benefit Pension Plans were the common and popular type of Pension Plan in the United States until the 1980's. After the 1980's, defined contribution Pension Plans became the more common and popular choice.
Defined contribution Pension Plans are defined as plans that provide individual accounts for each member and the benefits are based only on the amount that is contributed into the account. The contributions are generally invested and the amount that is yielded is credited to the individual account. In this type of Pension Plan, the risk and reward of investments are placed solely on the account holder, not on the employer.
Hybrid Pension Plans combine aspects of both the defined benefits Pension Plans and the defined contribution Pension Plans. While the Pension Plan sponsor takes responsibility for the risk and reward of the investment of the money, the benefits of the plan are based on the balance of the account.
The aging population is going to put Pension plans to the ultimate test in the next few years. With more and more people nearing retirement age, Pension Plans, as well as other retirement plans, are going to become more and more important.