• Some businesses provide their employees with pension benefits. These benefits help smooth your retirement by providing income. Employers are not required to provide any pension benefits. However, those that do offer such benefits are bound to follow the Employee Retirement Income Security Act provisions that set some standards for private pension plans. Rules also govern the payout of such benefits provided by defined benefit plans if the employer cannot make benefit payments.
  
  

Defined Benefit Plans

• A defined benefit plan requires your employer to make a specific monthly payment to you during your retirement. The plan could promise a certain dollar amount each month in retirement. However, employers usually prefer to use a formula to arrive at the benefit they will pay on retirement. These formulas take into account factors such as your salary and your years of service with the company.
  
  

Defined Contribution Plans

• Unlike defined benefit plans, defined contribution plans do not guarantee any payout. Instead, the plan invests money contributed regularly by the employee, usually with a matching contribution from the employer. At the time of payout, the employee gets the money contributed, with any investment gain or loss added or subtracted. Plans of this sort include 401(k)s and 403(b)s.
  
  

Pension Guaranty

• The government set up the Pension Benefit Guaranty Corporation (PBGC) under ERISA to protect the pension benefits of Americans in defined benefit plans from employers that are unable to keep up their payment commitments. PBGC is not funded by tax revenues. The entity collects insurance payments from employers that operate defined benefit plans. PBGC also makes money on investments and manages the funds of the plans it takes over. The maximum pension benefit that PBGC can guarantee is set by law and varies every year. For defined benefit plans that ended in 2009 and 2010, PBGC guarantees participants a maximum payout of $4,500 a month on retirement at age 65 years. The guaranteed benefit payment is lower for those who retire when younger than 65 or if there is a benefit for a survivor. The PBGC guaranteed amount is higher for those who retire when older than 65. There is no such guarantee for participants in defined contribution plans.