What is a pension plan?

What is a pension plan?

• A. A retirement plan where an employer makes contributions for an employee's future benefits
• B. An investment that individuals make independently
• C. A plan that allows employees to choose how much to save from their paycheck
• D. A government-mandated retirement savings account

Answer: (A)

A pension plan is defined as a retirement plan in which an employer makes contributions on behalf of employees. This type of plan is often designed to provide a fixed sum upon retirement, based on a formula that considers factors such as salary history and duration of employment. The key feature of pension plans is that they are employer-sponsored, meaning the financial responsibility for funding the plan typically lies with the employer instead of the employee. This approach provides employees with a sense of financial security during retirement, as their benefits are predetermined and not dependent on market fluctuations. In contrast, the other options describe different aspects of retirement planning or a savings approach. Independent investments are managed by individuals, typically through accounts such as IRAs or brokerage accounts, without employer contributions. Plans that allow employees to dictate their own contributions, such as a 401(k) plan, focus more on employee input regarding savings rather than employer-funded pensions. Lastly, a government-mandated retirement account refers to programs like Social Security, rather than a pension plan, which is specifically employer-sponsored. Each of these alternatives highlights different structures and responsibilities in retirement planning, further underscoring the unique nature of pension plans as employer-funded retirement solutions.

A pension plan is defined as a retirement plan in which an employer makes contributions on behalf of employees. This type of plan is often designed to provide a fixed sum upon retirement, based on a formula that considers factors such as salary history and duration of employment. The key feature of pension plans is that they are employer-sponsored, meaning the financial responsibility for funding the plan typically lies with the employer instead of the employee. This approach provides employees with a sense of financial security during retirement, as their benefits are predetermined and not dependent on market fluctuations.

In contrast, the other options describe different aspects of retirement planning or a savings approach. Independent investments are managed by individuals, typically through accounts such as IRAs or brokerage accounts, without employer contributions. Plans that allow employees to dictate their own contributions, such as a 401(k) plan, focus more on employee input regarding savings rather than employer-funded pensions. Lastly, a government-mandated retirement account refers to programs like Social Security, rather than a pension plan, which is specifically employer-sponsored. Each of these alternatives highlights different structures and responsibilities in retirement planning, further underscoring the unique nature of pension plans as employer-funded retirement solutions.