Most employees have one of two types of pensions:
Defined Benefit Plans
This type of plan promises an exact dollar amount upon your retirement. It calculates according to a specific formula such as amount times years of service.
Defined Contribution Plans
Unlike a defined benefit plan, this type of plan does not promise or pay out a specific dollar amount upon retirement. Rather, an employee contributes a certain amount to a fund and the amounts are subject to the contributions and investment gains of the company. The 401(k) plan is a common example of this type of plan.
A Simplified Employee Pension Plan (SEP), a Profit Sharing Plan and an Employee Stock Ownership Plan (ESOP) are all considered defined contribution plans.