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I have a Pension Plan and a Defined Contribution Program? What's the Difference?

What these retirement programs have in common is the fact that they are both vehicles to help provide for your long-term financial security.

Now let's look at how these two differ from each other. The biggest differences are in how they are funded, who makes the investment decisions, and whether or not plan benefits are guaranteed.

  Pension Plan Defined Contribution Plan
Who funds the program? The Plan Sponsor The employee, through payroll deduction (although the plan sponsor may also make a "matching" contribution, up to a specified percentage of what the employee contributes).
Who makes the investment decisions? The Plan Sponsor The employee–although certain matching contributions may have to be invested a certain way, such as in employer stock.
How is eligibility determined? The plan documents specify this: eligibility is usually based on length of service.
When are participants 100% vested in benefits? Participants are usually 100% vested when they reach a specified age or have completed a certain number of years of service. Participants are usually 100% vested in any employer contributions (and their investment earnings) when they have completed a certain number of years of service. Participants are always 100% vested in their own contributions (and their investment earnings).
When are participants eligible to collect benefits under the program? Usually, the ability to collect benefits is based on age and/or years of service.
How are benefits calculated? Often, a formula is used to determine how much participants will collect. This may be based on the employee's salary and years of service. Benefits are calculated based on how much has been contributed to the participant's plan account and the account's investment earnings.
How are benefits paid? Usually, in the form of a monthly income. It's the participant's choice: He or she may take benefits in the form of a lump sum or in regular periodic payments.
Is the benefit amount guaranteed? Yes No. The account value is based on a number of factors, including amount contributed and investment returns.

The table above provides a very basic explanation of the differences between pension and defined contribution programs. For detailed information about your program' provisions, contact your company's Human Resources department or your Plan Administrator.
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