Pension Plan Examples: Cash Balance, 401(k), and Public-Sector

Pension plan examples fall into four main categories: traditional defined benefit pensions, cash balance plans, 401(k) plans with employer matching, and public-sector pensions for government workers. Each one funds your retirement differently, puts the investment risk on different shoulders, and calculates your monthly check using a different formula. The type your employer offers shapes almost everything about what you’ll walk away with.

Traditional Defined Benefit Pensions

A defined benefit plan is the classic pension: your employer promises you a specific monthly payment for life once you retire. Federal law defines it as any pension plan that isn’t based on an individual account balance.¹ The plan has to meet tax-qualification rules that govern contributions and distributions.²

Most defined benefit plans use three ingredients to calculate your retirement check: your years of service, a benefit multiplier (usually between 1% and 2%), and your average salary over your highest-earning years.

Consider a worker who stayed 30 years at the same company, with an average salary of $80,000 across her top three earning years, under a plan that uses a 1.5% multiplier. The math: 30 × 1.5% × $80,000 = $36,000 per year, or $3,000 a month for life. The employer is on the hook to fund the plan well enough to cover that promise, regardless of how the markets perform in any given year.

If the sponsoring company goes bankrupt and can’t pay, the Pension Benefit Guaranty Corporation steps in as a federal backstop and takes over as trustee of the plan.³ For 2026, the PBGC guarantee ceiling is $7,789.77 per month for a 65-year-old retiree receiving a straight-life annuity.⁴ The guarantee drops if you retire earlier than 65 or add a survivor benefit for your spouse.

Cash Balance Plans

A cash balance plan is a hybrid. It works like a traditional pension behind the scenes, with the employer funding it and bearing the investment risk, but to the employee it looks more like a savings account. Instead of promising a formula-based monthly payment, the plan tracks a hypothetical account balance in your name.

Each year, your employer adds a “pay credit” to that account, usually a percentage of your salary. If you earn $70,000 and the plan credits 5% annually, $3,500 lands in your account for the year. Your balance also grows through interest credits. Federal law caps the interest rate at a market rate of return, and your balance can never drop below the total contributed by your employer, even if the underlying investments lose money.⁵ In practice, many plans credit around 3% to 5% annually, often pegged to a Treasury bond index or a fixed rate.

The big advantage is portability. When you leave, you can usually take your accumulated balance as a lump sum and roll it into an IRA, or convert it into a monthly annuity. That makes cash balance plans easier to manage across multiple jobs than a traditional defined benefit plan, where the formula heavily rewards staying put for decades.

401(k) Plans With Employer Matching

A 401(k) is a defined contribution plan, so there’s no guaranteed payout. You and your employer both put money into an individual investment account, and your retirement income depends on how much went in and how the investments performed. Federal law lets you elect to have part of your salary directed into the plan instead of paid as cash.²

The employer match is where the real money shows up. A common formula: 100% of the first 3% of salary you contribute, plus 50% of the next 2%. On a $60,000 salary, contributing 5% ($3,000) earns you $1,800 for the first 3% and $600 for the next 2%, giving you $2,400 in matching funds. Your total annual contribution hits $5,400 before any investment growth. Failing to contribute enough to capture the full match is one of the most common retirement planning mistakes.

The IRS caps how much you can defer each year. For 2026, the limit is $24,500. Workers 50 or older can add an extra $8,000 in catch-up contributions, for a personal ceiling of $32,500. Workers between ages 60 and 63 get a higher catch-up of $11,250, totaling $35,750.⁶ These limits apply only to your own contributions, not what your employer kicks in through matching.

Unlike a traditional pension, you carry the investment risk. If the market drops 30% the year before you retire, your balance drops with it. You also control the withdrawal strategy, which gives you flexibility but demands discipline to avoid running out of money.

Public-Sector Pension Plans

Government employees, including teachers, firefighters, and police officers, usually participate in defined benefit plans with more generous terms than private-sector equivalents. These plans are exempt from the federal rules that govern private pensions under ERISA.⁷ State legislatures set the funding requirements and benefit formulas instead.

Public plans often use higher multipliers. Where a private employer might offer 1.5%, a law enforcement plan might use 3%. A police officer retiring after 25 years with a 3% multiplier and a final salary of $90,000 would receive 25 × 3% × $90,000 = $67,500 per year. Many public plans also include automatic cost-of-living adjustments that bump your monthly check each year to keep pace with inflation.

Eligibility rules vary. Some systems use a “Rule of 80,” where you can retire with full benefits once your age plus years of service equals 80. A 55-year-old teacher with 25 years of service hits that threshold exactly. Other systems set a minimum age no matter how many service years you’ve accumulated.

Public employees whose employers didn’t withhold Social Security taxes used to face reduced Social Security benefits under the Windfall Elimination Provision and the Government Pension Offset. Both provisions were repealed by the Social Security Fairness Act, signed into law on January 5, 2025.⁸ The repeal applies retroactively to benefits payable from January 2024 onward. If you’re a public-sector retiree who never applied for Social Security because of the old rules, you now need to file an application to start receiving benefits.

Vesting: When You Actually Own the Benefit

Your employer putting money into a pension on your behalf doesn’t mean you keep it if you leave. Vesting determines how much of the employer-funded benefit is yours based on how long you’ve worked there. Your own 401(k) contributions are always 100% vested immediately, but the employer’s share follows a schedule.

Federal law allows two vesting structures for private-sector plans:⁹

Cliff vesting: you own nothing until you hit three years of service, then you’re 100% vested all at once.
Graded vesting: you earn ownership over six years, starting at 20% after two years and rising by 20% each year until you reach 100% at year six.

A “year of service” generally means working at least 1,000 hours during a 12-month period. All employees become 100% vested when they reach the plan’s normal retirement age or when the plan is terminated.⁹ If you’re thinking about leaving a job, check where you stand first. Walking out six months before full vesting is a quiet mistake that costs people tens of thousands of dollars.

Spousal Protections and Pensions in Divorce

If you’re married and covered by a private-sector pension, federal law automatically protects your spouse. The default payout is a qualified joint and survivor annuity, meaning your pension keeps paying your spouse after you die. The survivor payment must be at least 50% of what you were receiving while both of you were alive, and it can go as high as 100%.¹⁰ A qualified preretirement survivor annuity pays your surviving spouse a lifetime benefit if you die before retiring. The trade-off is that your monthly check during your lifetime is slightly smaller than a single-life annuity.

You can waive the survivor annuity and elect a larger single-life payment or a different beneficiary, but your spouse has to consent in writing, witnessed by a plan representative or notary public.¹⁰ Attempts to change beneficiaries without proper spousal consent get rejected routinely.

Pension benefits earned during a marriage are marital property in most states and can be divided in a divorce. The mechanism is a qualified domestic relations order, or QDRO: a court order directing the plan to pay a portion of the participant’s benefits to a former spouse.¹¹ Without a QDRO, pension plans are legally prohibited from paying anyone other than the participant. The order has to specify both parties, the exact amount or percentage, and the time period covered, or the plan administrator will reject it.

Taxes, Early Withdrawals, and Required Distributions

Pension payments are generally taxed as ordinary income in the year you receive them. If you never made after-tax contributions, the entire payment is taxable. If you did, the portion returning those after-tax dollars comes back tax-free.¹² Distributions from a designated Roth 401(k) account can also be tax-free if they meet qualifying requirements.

Taking money out before age 59½ triggers a 10% additional tax on top of ordinary income tax.¹³ On a $50,000 early distribution, that’s an extra $5,000 before income tax. Exceptions include separation from service at age 55 or later, total and permanent disability, substantially equal periodic payments based on life expectancy, qualifying medical expenses, and payments to a former spouse under a QDRO. Even when the penalty doesn’t apply, ordinary income tax still does.

You can’t leave money in a retirement plan forever. If you were born between 1951 and 1959, your required minimum distributions start at age 73. If you were born in 1960 or later, the age is 75.¹⁴ The first distribution is due by April 1 of the year after you reach the applicable age, and every one after that is due by December 31. Missing the deadline triggers one of the steepest penalties in retirement planning.

1
Office of the Law Revision Counsel. 29 USC 1002 – Definitions
2
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
3
Pension Benefit Guaranty Corporation. Understanding Your Pension and PBGC Coverage
4
Pension Benefit Guaranty Corporation. Maximum Monthly Guarantee Tables
5
Office of the Law Revision Counsel. 26 USC 411 – Minimum Vesting Standards
6
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
7
Office of the Law Revision Counsel. 29 USC 1003 – Coverage
8
Social Security Administration. Social Security Fairness Act
9
Internal Revenue Service. Retirement Topics – Vesting
10
Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity
11
Office of the Law Revision Counsel. 29 USC 1056 – Form and Payment of Benefits
12
Internal Revenue Service. Topic No. 410, Pensions and Annuities
13
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
14
Congressional Research Service. Required Minimum Distribution (RMD) Rules for Original Owners