Pension plan definition
/What is a Pension Plan?
A pension plan is an arrangement under which an employer pays into a pool of funds that will be used to provide benefits to employees when they are retired. The funds in the pool are then invested on behalf of the employees, so that the initial contribution plus subsequent investment income will be available to pay benefits. These arrangements are usually tax advantaged.
Types of Pension Plans
A pension plan may take the form of a defined contribution plan, where the entity is only liable to make a certain contribution amount to the plan, or it may be a defined benefit plan, where the entity must provide a specific type and amount of benefit to retired employees in the future. A defined contribution plan is the more common of the two plans, since it is much less expensive for an employer to fund it.