Pension — an arrangement in which employees are provided with an income during
retirement, usually in the form of monthly payments once they are no longer
working. Most often, pensions are funded during a person's working years by
means of joint contributions from both workers and their employers. Pensions
are operated by private employers or by government (i.e., federal, state, or
local) employers. The three major types of pensions are (1) defined benefit
plans, in which the monthly benefit is determined by formula (based upon
earnings and years of service); (2) defined contribution plans, in
which the contributions are paid into the individual account of each employee
and whose monthly benefit is a function of the amounts of and the investment
returns on those contributions (e.g., 401(k) accounts); and (3) cash
balance plans, which are also known as "hybrid plans," since
they combine features of both defined benefit and defined contribution plans
(i.e., the employer promises a specific rate of return on the employer's
contribution, for which the employee retains an individual account).