A pension is a defined benefit: the employer promises an income in retirement, usually calculated from your salary and years of service, and carries the investment risk. A 401(k) is a defined contribution: money goes into an account you own and you carry the risk. Comparing them means comparing a formula against a balance, which is why headline salary comparisons between the two sectors are so often wrong.
Two promises with different risk holders
A defined benefit pension promises an income in retirement, calculated from a formula — usually years of service, a percentage, and a final or average salary. The employer carries the investment risk and the longevity risk.
A defined contribution plan promises a contribution now. What it becomes depends on markets and on your own decisions, and you carry both risks. That difference is the whole comparison.
How to compare them on the same terms
Convert both to a percentage of salary. A defined contribution plan states its percentage directly — an employer contributing six per cent is adding six per cent.
A pension takes an extra step: read the formula. A plan accruing two per cent of final salary per year of service is building a substantial entitlement, and its economic value as a percentage of current pay is frequently well above what any matching arrangement offers.
The formula details that change everything
Which salary the calculation uses — final year, best three years, or a career average. Career average is materially less generous where pay rises through a career, and the difference is large.
Whether payments are indexed to inflation after retirement. An unindexed pension loses purchasing power every year: with prices up about 22.9 per cent over five years, an unindexed income buys roughly four-fifths of what it did.
And what happens to a surviving spouse, which is a real term with a real value.
Vesting is far more consequential in a pension
Defined contribution employer money vests no slower than three-year cliff or six-year graded under federal rules. Pension vesting can run longer, and the benefit is heavily back-loaded — leaving early in a career forfeits far more proportionally than the years suggest.
Which is why pensions retain people so effectively, and why somebody midway to a vesting milestone should price leaving carefully rather than by salary alone.
Portability is the honest advantage of the other one
A defined contribution balance moves with you. It rolls to a new employer’s plan or an individual account, and it keeps compounding regardless of how many times you change jobs.
A pension is anchored to one employer. For somebody expecting several moves that is a genuine cost, and it is the strongest argument for the modern arrangement over the traditional one.
Where pensions still exist
Largely in public-sector employment — state and local government, education, public safety — and in some unionized private employment. Those are also the sectors with steadier employment and lower ceilings, which is not a coincidence.
The whole package is a trade: less at the top, more certainty later. It suits some careers very well and it should be a decision rather than something you notice a decade in.
What to ask before accepting either
For a pension: the accrual rate, which salary the formula uses, the vesting period, whether payments are indexed, and what your own contribution is.
For a defined contribution plan: the employer contribution, whether any part is non-elective, the vesting schedule, and the formula in writing — because “up to six per cent” and “six per cent” are different offers.
The comparison people get wrong
Judging a public-sector offer on salary alone. A lower base with a substantial pension accrual and employer-paid coverage can beat a higher private-sector base, and the gap is invisible until both are converted into percentages of pay.
This is general information rather than financial advice, and pension terms in particular depend heavily on the specific plan.
Common questions
What is the core difference?
A pension promises a defined income and the employer carries the investment risk. A 401(k) is an account you own and you carry the risk.
Why do pension employers often pay less?
Because the promise is part of the compensation. Comparing salary alone between the two systematically understates the pension side.
What if I do not stay long?
Defined benefit plans reward long tenure heavily, so leaving after a handful of years captures very little of the value.
What should I ask about a pension?
The formula, the vesting period, whether there is a cost-of-living adjustment after retirement, and what leaving early actually yields.
What should I check on a 401(k)?
The match formula, the vesting schedule, and the fees on the available funds, which compound against you over a career.
How do I compare a pension against a 401(k)?
Convert both to a percentage of salary. A defined contribution plan states its percentage directly; for a pension, read the accrual formula.
Which pension details matter most?
Which salary the formula uses — final, best three years or career average — whether payments are indexed to inflation, and the vesting period.
What is the main advantage of a 401(k)?
Portability. The balance moves with you and keeps compounding, whereas a pension is anchored to one employer and is heavily back-loaded.