pension

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 on 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).