Q:

What are pension plans?

A:

Quick Answer

Pension plans are retirement savings plans that employers set up to provide future financial security to employees, according to the U.S. Department of Labor. The two major types of retirement plans have a number of possible variations. Plan administrators are required to provide employees with a formal plan document and summary plan description to help employees understand the details of the plan.

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Full Answer

The two main types of pension plans are the defined benefit plan and the defined contribution plan, explains the U.S. Department of Labor. The defined benefit plan offers employees a specific monthly stipend when they retire. In a defined contribution plan, the employee and employer contribute to an investment account, usually through pre-tax paycheck deductions and matching contributions. When employees retire, they receive the account balance to draw from within the guidelines of federal law. Pension plan documents must specify details such as who can participate in the plan, how benefits accumulate, survivor's benefit options, claims procedures and responsibilities of the plan's managers.

According to federal law, pension plans are optional, states the U.S. Department of Labor. Employers are not obliged to offer them and can discontinue them at any time. Although employers can reduce future plan benefits, they cannot cut benefits that employees have already earned. The Pension Benefit Guaranty Corporation insures defined benefit plans that terminate with insufficient funds, but it does not cover defined contribution plans.

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