What is a pension plan?

A pension plan is best characterized as a retirement account established by employers to provide benefits to employees after they retire. This type of plan is designed to ensure that employees have a source of income during their retirement years, typically funded through contributions made by the employer, and sometimes co-funded by the employee as well. The funds accumulated in a pension plan are usually invested, and the plan provides a predetermined payout to the retiree, which can be based on factors such as salary history, years of service, and age at retirement.

The focus of a pension plan is on providing stability and security for employees once they finish their careers, distinguishing it from other options that do not carry the same employer-sponsored structure or guarantee of benefits for retirees. This distinguishes pension plans from savings accounts, which are typically managed by individuals and do not inherently offer the same level of employer commitment to providing retirement income. Similarly, insurance policies and legal documents regarding job descriptions do not pertain to the specific type of retirement benefits that pension plans provide.