Four key features of a defined benefit pension plan

1 A pension provides predictable retirement income

Whether offered by an employer or a union, the purpose of a defined benefit pension plan is to pay eligible workers a predictable amount of retirement income for a certain period. In most cases, these payments would last throughout your retirement.

This contrasts with a 401(k) or other type of defined contribution plan. With these plans, the focus is on the contributed amount of money that goes toward funding your account, which can come from your own paycheck and from your employer. With a defined contribution plan, you decide when to make withdrawals—and you’re also responsible for making it last through retirement.

The size of the payments you receive in a pension plan is based on four primary factors:

• How long you work for the employer or union that sponsors the plan
  
• Your earnings during those years
  
• When you decide to retire and start taking benefits
  
• The payment option you choose
  

The exact formula used to calculate the benefit you’ll receive is decided by the plan sponsor (your employer or union). For instance, some base their benefit on the average earnings of the participant over the last several years of their tenure. Others pay out a flat amount multiplied by the employee’s years of service. In almost all cases, years of service is a critical factor in determining the benefit that will be paid out.

As a result, if you don’t spend a long time with the employer or union offering the plan, odds are that the pension alone won’t be enough to cover all your retirement expenses. You’ll want to also consider taking part in any other type of retirement plan that your job offers, to help make sure you’re saving enough for your future.

Even so, the dependable source of retirement income each month that comes from a defined benefit pension plan can be a substantial benefit. No wonder employees take so much pride in announcing that their job “comes with a pension.”

2 It’s easy to keep track of what your benefit might be

If you’re offered a defined benefit plan, you’ll most likely have access to a handy tool, called a pension estimator on your benefits website.

Because the site itself is maintained by the plan’s recordkeeper, the pension estimator is always loaded with fresh information on your earnings, your tenure with your employer, and your plan’s rules and benefit formula.

To help estimate how much you could collect, simply select the age you expect to retire and a payment option, then click the button for your estimated benefits. Or do like so many others do—and compare the possibilities.

Instant, on-demand estimates can come in handy when you’re trying to plan for retirement income.

3 You control how benefit payments flow

Another helpful aspect of defined benefit pension plans is that they offer flexibility in the way your benefits are paid out. Do you have a spouse? Do you expect higher expenses earlier in retirement? Do want to guarantee an income stream for as long as possible? You may be able to plan around the answers to those questions. Here are some of the most common payout options.

The longer your potential payments stretch out, the smaller each one will be. But they provide a dependable base payment you know you can count on. And joint lifetime options with survivor benefits may be an attractive option, especially if your spouse doesn’t have their own retirement plan.

On the other hand, if you’re anticipating fewer years in retirement—or think you’ll need more cash in earlier years—it may be worth considering a lump sum or “term-certain” alternative.

With a pension plan, the choice is yours.

4 You have a benefit to which few have access

While 65% of U.S. private sector workers have access to 401(k)s and other types of defined contribution plans, far fewer have access to defined benefit pension plans. Just 15% of the U.S. private sector workforce have pension plans available to them.¹ 

Why do so few workers overall have access to pension plans? One important factor may be cost. Pension plans can be more expensive for employers to maintain than 401(k)s and other defined contribution plans. And managing a defined benefit plan can become even trickier when the investments that fund the benefits go through down periods.

But if a private sector job with a pension plan is appealing to you, you may want to focus on larger organizations. Corporations with over 500 employees are by far the most likely to offer one.

U.S. private sector workers with access to pension plans

By organizations' employee counts, March 2021

Source: “Worker Participation in Employer-Sponsored Pensions: Data in Brief,”  Congressional Research Service, 11/23/21.

Overall, what kinds of jobs are most likely to come with a pension? State government, local government, and private sector union positions are your best bets.

Access to pension plans in three sectors

By type of organization, March 2021

Source: “Worker Participation in Employer-Sponsored Pensions: Data in Brief,”  Congressional Research Service, 11/23/21.

Where does a pension plan fit into your retirement strategy?

Defined benefit pension plans can be a very attractive retirement benefit, providing the potential for predicable payments, the ability to look ahead at what your benefit might be, and a choice of payout options. But because you may not always have access to a pension—and alternatives like 401(k)s and IRAs also have so much to offer—it’s smart to view your defined benefit plan as part of a well-rounded retirement strategy.

1 “Worker Participation in Employer-Sponsored Pensions: Data in Brief,” Congressional Research Service, 11/23/21.