What's the Difference Between a Defined Benefit Plan and a Defined Contribution Plan?

A defined benefit plan and a defined contribution plan are two very different ways employers provide retirement benefits, and they have different tax implications. A defined benefit plan, commonly called a pension, promises a specific monthly payment in retirement based on your salary and years of service — the employer bears the investment risk and is responsible for ensuring enough money is available to pay the promised benefit. A defined contribution plan, like a 401(k), specifies how much you and your employer contribute each year but makes no promises about the final retirement benefit — the amount you end up with depends on investment performance. Contributions to both types of plans are generally tax-deferred, and withdrawals are taxed as ordinary income. Defined benefit plans are increasingly rare in the private sector, where defined contribution plans have become the standard.