Pension vs. 401k: Defined Benefit vs. Defined Contribution and the Difference Between a Pension and an Annuity

A 401(k) is a defined contribution plan where the employee contributes from their paycheck, investment returns are not guaranteed, and the account balance determines what you can spend in retirement. Pensions shift investment and longevity risk to the employer; 401(k)s place those risks on the individual. Pensions are increasingly rare outside of government and union employment. An annuity is a financial product purchased from an insurance company that converts a lump sum into a guaranteed income stream, functioning somewhat like a pension you create yourself. While pensions and annuities both provide guaranteed income, an annuity is a purchase rather than an employer benefit, and the terms vary widely. For retirees with a pension, deciding whether to take a lump sum or monthly payments is one of the most consequential financial decisions they face. At Moore Invested, we help clients evaluate pension payout options alongside their other retirement income sources to determine the most advantageous strategy.

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