Defined Benefit vs. Defined Contribution: Key Retirement Plan Difference
Written by
Rudri Patel
Edited by
Joe Evans
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Choosing between a defined benefit vs. defined contribution plan can make or break your retirement strategy. The difference comes down to who takes on the risk — your employer or you. A defined benefit plan (a traditional pension) guarantees steady income for life, while a defined contribution plan, like a 401(k), depends on how much you contribute and how your investments perform.
Both play a major role in retirement security — but they operate in completely different ways.
Quick Facts
| Feature | Defined Benefit Plan | Defined Contribution Plan |
|---|---|---|
| Who manages it | Employer | You |
| Who bears the risk | Employer | Employee |
| Payout type | Guaranteed monthly income for life | Depends on contributions & market performance |
| Examples | Pension | 401(k), 403(b), 457(b) |
| Portability | Limited | Fully portable |
| Prevalence | 15% of private industry workers had access to a defined-benefit pension plan through their employer | About 60% of U.S. workers have access to a 401(k) or similar plan |
What Is a Defined Benefit Plan?
A defined benefit plan — commonly called a pension — promises a fixed, lifetime income after you retire. Your employer contributes to and manages the plan, taking on the investment and longevity risk.
Guaranteed Lifetime Pension Explained
You’ll receive a set monthly payment for life, usually based on your final salary and years of service. For example:
$70,000 average salary — 35 years — 1.5% multiplier = $36,750 annually, or about $3,062 per month.
Your spouse may also receive survivor benefits, depending on plan terms.
Employer Risk, Funding & PBGC Protections
Employers are legally required to fund these plans. If a company fails, the Pension Benefit Guaranty Corporation (PBGC) may step in to cover part of your benefit — though not always the full amount.
As of 2024, PBGC protects over 31 million workers in 25,000 private-sector pension plans.
What Is a Defined Contribution Plan?
A defined contribution plan is an account you and your employer contribute to — like a 401(k), 403(b), 457(b) or profit-sharing plan. Your retirement savings grow based on your contributions and investment performance.
How Contributions & Growth Work
You decide how much to save (usually a percentage of your paycheck), and your employer may match part of it. According to Fidelity, the average 401(k) employer match is 4.8% in 2025 — free money you shouldn’t leave on the table.
Your balance changes with the market, giving you flexibility but also risk exposure.
Tax Advantages
Your contributions are tax-deferred, meaning you don’t pay taxes until withdrawal. In a Roth 401(k), contributions are made after tax, but withdrawals are tax-free in retirement.
Typical Fees
Defined contribution plans come with:
- Expense ratios (usually 0.5% to 1% of assets)
- Administrative fees for recordkeeping
- Advisory fees for plan guidance
Even a 1% annual fee can reduce lifetime returns by nearly $100,000 over 35 years, according to the Department of Labor.
Defined Benefit vs. Defined Contribution: Pros and Cons
| Limited; benefit may be reduced if you leave early | Defined Benefit Plan | Defined Contribution Plan |
|---|---|---|
| Income guarantee | Lifetime, guaranteed | Market-based, not guaranteed |
| Control | Employer manages investments | You control how funds are invested |
| Portability | Lower; employer contributes a match only | Fully portable; can roll over |
| Employer costs | High funding and administration costs | 0.5% to 1% annual fees are typical |
| Employee costs | Minimal | 0.5% to 1% annual fees are typical |
| Risk | Employer bears risk | Employee bears market risk |
Who Bears the Financial Risk?
This is where defined benefit vs defined contribution plans differ most.
- Defined benefit: The employer assumes investment and longevity risk — paying benefits even if markets drop.
- Defined contribution: You carry the market and withdrawal risk. The amount you receive depends on how much you contribute and how investments perform.
If an employer goes bankrupt, PBGC insurance can still provide partial payments from the pension fund.
Cost and Fee Breakdown
Defined benefit plans are expensive for employers but cost-effective for employees.
- Employers handle actuarial, insurance and administrative costs.
- Employees typically pay nothing directly.
Defined contribution plans, however, shift costs to employees:
- Average all-in fees: 0.78% of assets under management
- Choose low-cost index funds or ETFs to cut expenses.
- Always request a fee disclosure statement to see how much you’re paying.
Choosing What’s Right for You
When deciding between retirement plan types, the right choice depends on your goals, risk tolerance and whether you value guaranteed income or control over your investments. Here’s a breakdown to help choose what’s best for you!
If You Have a Defined Benefit Plan
- Stay vested as long as possible — leaving early can shrink your payout.
- Understand survivor benefits and early-retirement penalties.
- Confirm your plan’s funding status through your HR department or PBGC.gov.
If You Have a Defined Contribution Plan
- Contribute enough to maximize your employer match.
- Diversify your investments across stocks, bonds and target-date funds.
- Periodically rebalance your portfolio to manage risk.
Blended or Hybrid Strategies
If you’re between jobs or retiring soon, consider:
- Rolling over old 401(k)s into one account to simplify fees.
- Buying an annuity to create a lifetime income stream.
- Delaying Social Security to increase your guaranteed benefits.
Trends & Future Outlook
Traditional pensions are fading fast. The Bureau of Labor Statistics (BLS) reported in March 2025 that only about 14% of private-sector workers had access to a defined benefit plan. Meanwhile, by the end of 2023, nearly 60% of U.S. workers had access to a 401(k) plan. This access varies by the size of the employer:
- 57% of private-sector firms with fewer than 100 workers offer a retirement plan.
- 91% of firms with 500 or more employees offer a plan.
- 86% of firms with 100 or more employees offer a plan.
However, new hybrid plans — called Collective Defined Contribution (CDC) plans — are emerging. These combine 401(k)-style contributions with shared-risk payouts similar to pensions. Major companies like Boeing and UPS have seen employee pushback against pension freezes, hinting at potential policy shifts ahead.
Final Take to GO
When comparing defined benefit vs defined contribution, the core difference is control versus certainty.
- Defined benefit plans offer guaranteed lifetime income with little flexibility.
- Defined contribution plans give you control and growth potential but come with market risk.
If you’re lucky enough to have both, use your pension for stability and your 401(k) for growth. For personalized guidance, consult a fiduciary financial advisor or use our retirement planning calculator to see how each option fits your goals.
FAQs: Defined Benefit vs. Defined Contribution Plans
Here are the answers to some of the most frequently asked questions about different retirement plans and how they work:- What is the main difference between a defined benefit and a defined contribution plan?
- A defined benefit plan (pension) guarantees lifetime income based on your salary and years of service -- your employer bears the risk. A defined contribution plan, like a 401(k), depends on your contributions and investment performance, so you bear the market risk.
- Which is better for retirement security -- pension or 401(k)?
- If guaranteed income and stability are your top priorities, a defined benefit plan offers more security. But if you want control, flexibility and growth potential, a 401(k) or defined contribution plan may be better. Since fewer than 4% of private companies offer pensions (BLS, 2024), most workers rely on 401(k)s as their main retirement vehicle.
- What happens to my pension if my employer goes bankrupt?
- If your company has a private pension, the Pension Benefit Guaranty Corporation (PBGC) provides backup protection. PBGC insures over 31 million workers across 25,000 plans and may pay part of your benefit if your employer fails. However, coverage caps apply, so you may not receive the full amount.
- Can I roll over a defined benefit plan into a 401(k)?
- In some cases, yes -- but only if your pension offers a lump-sum payout option. Monthly pension payments cannot be rolled over. If eligible, you can transfer the lump sum into an IRA or 401(k) to maintain tax deferral and investment control.
- Are public pensions safer than private pensions?
- Generally, yes. Public-sector pensions are backed by state or local governments rather than individual employers. However, funding shortfalls still exist in some states. Always review your plan’s funding ratio and ask your HR department for the latest actuarial report.
- Can I have both a defined benefit and a defined contribution plan?
- Yes. Some workers, especially in the public sector or large corporations, may have both. If you do, use your pension for guaranteed income and your 401(k) for long-term growth. This hybrid approach can balance stability with flexibility and maximize retirement income potential.
Information is accurate as of Oct. 29, 2025.
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- Pension Benefit Guarantee Corporation "Pension Insurance Premiums Fact Sheet"
- Fidelity "How does a 401(k) match work?"
- U.S. Department of Labor "A Look At 401(k) Plan Fees"
- Plan Advisor "Popularity of No-Load Mutual Funds Whittles Down Fees"
- U.S. Bureau of Labor Statistics "EMPLOYEE BENEFITS IN THE UNITED STATES – MARCH 2025"
- U.S. Bureau of Labor Statistics "Retirement plans for workers in private industry and state and local government in 2022"
- Marketplace "Pensions or 401(k)s? It’s an issue for striking Boeing workers and others"
