Pension vs 401(k)

The real difference

A defined benefit pension promises an income. A defined contribution plan promises an account. Everything else follows from that. In a pension the employer has to produce a specific monthly payment for as long as you live, whatever markets do and however long that turns out to be. In a 401(k) or 403(b) you have a balance, and what it produces depends on how it was invested and how long you need it to last.

Longevity risk: the pension’s real advantage

This is the one that matters most and gets discussed least. A pension pays until you die. A balance can run out.

The difficulty with a 401(k) is not just deciding how much to withdraw — it is that you cannot know how long you need the money to last. Plan for 20 years and live 32, and the last 12 are a serious problem. A pension solves this by pooling: the fund does not need to know how long you will live, only how long the membership lives on average. No individual can replicate that on their own, which is why annuities exist and why they are expensive to buy privately.

Investment risk sits in different places

In a pension the employer and the fund bear it. If returns disappoint, the plan sponsor has to make up the shortfall — which is why underfunded public pensions become political fights, and why several of these systems have added shared-risk provisions that can nudge member contributions up or down. PSERS Pennsylvania reviews Class T-G rates every three years against ten-year performance and can move them by up to 0.75%.

In a DC plan you bear it entirely, including sequence-of-returns risk. Two people with identical average returns over 30 years can end up in very different places depending on when the bad years arrived. A sharp downturn in the first years of retirement, while you are withdrawing, does damage that a later recovery cannot fully undo.

Portability and back-loading

DC balances are yours early. DB benefits are back-loaded by design: the benefit depends on final average salary, so value concentrates in your last years, and leaving before vesting forfeits the employer share completely.

Florida makes this trade-off explicit by asking new employees to choose. Its own material describes the Investment Plan as accruing benefits more or less evenly across a career, against a Pension Plan that back-loads. That is the portability question stated plainly.

Inflation

Here the advantage is not obviously with the pension. A DB benefit is only as inflation-proof as its COLA provision, and several of these plans have none. TRS Texas and PSERS Pennsylvania pay no automatic increase to anyone retiring today. A fixed pension is, in economic terms, a very long bond with no inflation protection.

A DC balance at least can be invested in assets that grow faster than prices. Whether it is depends on the member, which is precisely the point: the DC plan hands you both the opportunity and the responsibility.

The part people leave out

What the employer puts in tells you something

These are not directly comparable — pension employer rates include paying down unfunded liabilities from past service, so they overstate the cost of your own benefit. But the order of magnitude is informative, and it is a reminder that the headline multiplier is being paid for by somebody.

The FERS middle path

FERS is worth studying because it deliberately combines all three approaches. A small annuity at 1.0% per year of service, or 1.1% if you leave at 62 with 20 years. Full Social Security. And a TSP where the agency contributes 1% automatically and matches up to 4% more, so a federal employee contributing 5% has 10% of pay going in.

A 30-year FERS employee gets 30% of high-3 from the annuity alone, which looks meagre next to a Texas teacher’s 69%. Add Social Security and a TSP funded at 10% of pay for three decades and the comparison looks very different. Each leg is individually modest and each covers a weakness in the others: the annuity handles longevity, Social Security handles inflation, the TSP handles portability and inheritance.

How to decide when you have a choice

• Expect a full career in public service? The DB plan is usually the better value, because back-loaded accrual rewards exactly that.
• Unsure you will stay a decade? The shorter vest or the DC option protects you from the outcome where you leave at year nine with a refund.
• Worried about inflation over 30 years? Check the COLA before assuming the pension wins. A no-COLA pension and a well-invested DC balance are closer than they look.
• Outside Social Security? Weight the guaranteed lifetime income more heavily. There is no second leg underneath you.
• Have both? Then the question is not either-or. Let the pension cover fixed costs and use the DC account for inflation protection and flexibility.

Plan data on this page was last checked against the system’s own published material on September 19, 2026. Retirement systems change their rules; if you spot something out of date, tell us.