Employees do not have control of investment decisions with a pension plan, and they do not assume the investment risk. Rather, contributions are made, either by the employer or by the employee, often both, to an investment portfolio that is managed by an investment professional. The sponsor, in turn, promises to provide a certain monthly income to retired employees for life based on the amount contributed and, often, the number of years spent working for the company.
The guaranteed income comes with a caveat: If the company’s portfolio performs poorly, the company declares bankruptcy, or faces other problems, it is possible that benefits are reduced. Almost all private pensions are insured by the Pension Benefit Guaranty Corporation, however, with employers paying regular premiums, so employee pensions are often protected.
Pension plans present individual employees with significantly less market riskthan 401(k) plans.