A pension plan is a type of retirement plan where employees contribute to a pool of funds that are used to pay for the employees’ retirement. The employer controls the type of investments in the plan, although some plans may have a voluntary investment component.
There are two types of pension retirement plans. The older type is called a defined-benefit plan. In this plan, the employer invests the pension's contributions into low-risk assets. Retirement payments are determined from a formula based on years of service and independent of the retirement fund’s performance. The more modern version is called a defined-contribution plan where employee plan contributions are usually matched by the employer. In these plans, retirement benefits are dependent on the plan’s performance.
