What is a ‘Pension Plan’

A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker’s future benefit. It’s a kind of defined benefit plan. The pool of funds is invested on the employee’s behalf, and the return on the investments generate income to the operator upon retirement.

In addition to an employer’s compulsory contributions, some pension plans have a voluntary investment component. A pension plan may allow an employee to contribute part of his current income from wages into an investment plan to help fund retirement. The employer may also match a portion of the employee’s annual contributions, up to a specific percentage or dollar amount.