Pension vs. 401(k): Differences between the two retirement plans

Yeah, a pension is better than a 401k plan … except if you are not employed with the employer long enough to be vested or accumulate sufficient service. Pensions were designed at a time when employment was more stable and long term.

I have a pension that provides me with a comfortable retirement, but I worked for one company for nearly fifty years and during those years I likely traded higher salaries with other employers for that future pension.

True, an employee with a pension doesn’t decide on the investments, but so what? While loans and early withdrawals are generally not available, there are plans that permit loans. In any case, loans and early withdrawals are detrimental to retirement planning.

Wile the article below says control over investments and investing strategy is an advantage of a 401k, for most workers the opposite is true. Unfortunately, with few exceptions workers cannot or do not effectively manage their 401k investments.

A pension isn’t necessarily better than a 401(k). It may seem more advantageous on the surface — hey, you don’t have to save any of your own money to retire comfortably and you have a steady income — but there are trade-offs.

An employee with a traditional pension plan doesn’t get to decide where their future retirement funds get invested today. They also can’t take loans or early withdrawals from the plan.

Someone with a 401(k) has full control over their investment choices and can fit them into their overall investment strategy, and has the power to draw on their savings before retirement if needed. If you don’t manage risk well and your interest in financial markets is low, you might think a pension plan sounds like a better deal. The opposite could be true, too.

Also, traditional pensions aren’t portable. If you leave your job before your pension vests, you’ll never see the money. With a 401(k), you get to keep your contributions no matter when you leave.

Source: Pension vs. 401(k): Differences between the two retirement plans – Business Insider


  1. “A pension is better than a 401k plan” – Not always. Lots of 401k’s have profit sharing components that may provide a greater benefit.

    Even where the employer financial support is the same dollar amount, a defined benefit pension plan may provide the majority of participants less value than a 401(k) – where the plan is a final average pay plan, fully integrated with Medicare, providing early retirement subsidies and post-retirement COLAs, as well as generous survivor benefits.

    Yes, individual account retirement savings plans like 401(k) plans may be more valuable as they tend to have no vesting requirements for the employer contributions or shorter period vesting schedules. That is particularly true because employment/tenure patterns haven’t changed all that much – for over the past five decades, according to the Department of Labor, median tenure for workers ages 25 – 64 has been < 5 years, < 3 years for those ages 25 – 34. So, that shorter vesting schedule makes a difference. It was always a myth when people said once upon a time, a majority of workers stayed with their firms for decades. In my 31 years as a plan sponsor (1979 – 2010), I always had access to data on our defined benefit pension plans, and, guess what, less than 5% of all new hires were projected to become true "retirees" – who would stop working upon leaving my firm after completing 25+ years of service and reaching age 65.

    Yes, the individual account retirement savings plans like the 401(k) tend to have earlier eligibility when compared to non-contributory defined benefit pension plans – often allowing participation from the date of hire along with deployment of automatic enrollment features. A defined benefit pension plan may not count service for participation (benefit calculation purposes) until the individual has reached the entry date, which can be as late as 18 months after hire and attaining age 21.

    And, of course, the 401(k) is a profit sharing plan, which means that it is always fully funded. A defined benefit pension plan is a promise to pay, and, particularly if you are in a multiemployer plan or a public employee plan, many of those plans are woefully underfunded.

    "In any case, loans and early withdrawals are detrimental to retirement planning." Loans are not detrimental to retirement planning. 90+% of plan loans are repaid. Where the interest rate on the plan loan is less than the rate on a loan from a commercial source and greater than the rate on other fixed income investments in the plan, a plan loan can improve both the worker's household wealth AND retirement preparation. Just don't forget to treat the plan loan principal as the fixed income investment it is. And, remember, when taking a plan loan, you are both the borrower (your current self) and the lender (your future self). DB and DC pension plans could provide loans – but not likely to use the same structure as most 401(k) and 403(b) plans.

    Finally, people leave un-vested employer contributions to 401(k) plans behind all the time.


  2. Richard I’m in a similar situation as you were. I’m one of the last dinosaurs with a pension and 401k. Been with my employer for 34 years. Hope to make a few more – each additional year adds 2% to my pension formula. And like you, I’ll agree that the “pension handcuffs” probably kept the salary a little depressed, especially for the years after turning 55. But all in all, I fall on my knees everyday and express my thanks for having this in place. I also have a spouse survivorship option that will continue to pay my younger spouse 75% of my pension value for her life.


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