By Eric Whiteside
Source: Investopedia

For some years now, traditional pension plans, also known as pension funds, have been gradually disappearing from the private sector. Today, public sector employees, such as government workers, are the largest group with active and growing pension funds.

How Pension Funds Work

The most common type of traditional pension is a defined-benefit plan. After employees retire, they receive monthly benefits from the plan, based on a percentage of their average salary over their last few years of employment. The formula also takes into account how many years they worked for that company. Employers, and sometimes employees, contribute to fund those benefits.

As an example, a pension plan might pay 1% for each year of the person’s service times their average salary for the final five years of employment. So, an employee with 35 years of service at that company and an average final-years salary of $50,000 would receive $17,500 a year.

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