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A pension plan is a retirement plan that pays a fixed monthly amount each year during retirement, like an annuity. The Employee Retirement Income Security Act of 1974 (ERISA) does not require employers to provide pension plans, but does set the minimum standards for those employers who offer pension plans.
Companies pay a specified amount in benefit to employees, otherwise known as a defined benefits plan. The amount is calculated with a formula that may include salary, years of service, and a fixed percentage. Most pension plans allow employees to start claiming the benefits at age 65.
A pension plan offers retired employees stability because the benefits are defined by a formula, rather than being subject to investment performance risks as in a 401(k) plan.
Employers usually pay the full cost of employee pension plans and therefore pension plan benefits are an important component of the total compensation package.