Familiarizing yourself with the U.S. pension system and how it works

Overview of the United States Retirement System

There are two main types of pension plans in the United States: traditional defined benefit plans and defined contribution plans. Traditional defined benefit (db) plans are employer-sponsored pension plans that guarantee a certain level of income to retirees based on years of service and salary levels during employment. Defined contribution (dc) plans are funded by employees who contribute to individual accounts on a pre-tax basis. These contributions increase over time, with compensation or other incentives available to the employer depending on the type of plan selected.

Types of retirement plans in the United States

The two most common types of retirement plans in the United States are traditional defined benefit plans and cash balance plans. A traditional defined benefit plan is typically provided by an employer who makes contributions to an account based on the employee's salary or wages over time. The total assets in this account can then be used to pay benefits at retirement, usually through an annuity or lump sum structure. A cash balance plan is similar, but it uses a single fund balance to determine eligibility for retirement benefits, meaning that salary history or years worked are not considered in determining eligibility, as is the case in db plans.

Defined contribution plans have become increasingly popular in recent years due to their flexibility in investment options, portability from one job/employer to another, and the tax advantages associated with them.