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Understanding the Difference between Pensions & 401Ks

As if planning for retirement wasn’t stressful enough, there is a need to understand the difference between a pension and a 401(k) plan. The importance of recognizing the distinctions between the two is important as pensions aren’t as ubiquitous as they used to be; however, some companies do offer them as part of their employee benefits package.

Traditionally, pensions were practically a staple in the private sector. Increasingly, they are — and have been — replaced by 401(k) plans.

So, what’s the difference?

Here we highlight the basic differences between pensions and 401(k) plans and follow it with an invitation to contact our team of experts for more detailed information, specific to your individual retirement plan and goals.

Pensions vs. 401(k) Explained

To start with the similarities, both pensions and 401(k)s are employer-sponsored retirement plans. Not long ago, pensions were commonplace in the private sector, but have increasingly been replaced by 401(k)s. The exception to this general rule is found in the public sector where pensions are still commonly offered, particularly in government jobs.

What separates one from the other is that a 401(k) is considered a defined-contribution plan, meaning employees contribute and employers have the option to match those contributions. Matching employer contributions are what makes a 401(k) such an attractive option. The match is determined by how much you contribute; for instance, dollar-for-dollar, 50 cents per dollar, and even up to 6% of your total contribution.

Keep in mind there is a limit to how much you can contribute to your 401(k) plan each year. This year, 401(k) contribution limits for individuals are $19,500, or $26,000 for employees aged 50 years or older.

On the other hand and, as we mentioned, far less common these days, a pension is a defined-benefit plan, funded completely by an employer and allocates a specific payment once an employee has retired.

Ultimately, the critical contrast between a pension and 401(k) is that the responsibility to save and invest for retirement is now placed on the shoulders of the employee, rather than the employer. Employee contributions into a 401(k) are typically automatically deducted from their paychecks and then invested into whatever funds the employee has chosen.

If you feel overwhelmed when it comes to retirement planning, we are ready to help and provide you with the knowledge and confidence you need to approach — and enjoy — your well-deserved retirement.

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