9 Common Types of Retirement Plans: A Guide for Employees and Employers

5. Pensions

Pensions, also known as defined benefit plans, represent a traditional model of employer-sponsored retirement savings. Under this type of plan, the employer typically promises a specific monthly income in retirement, usually for life, based on a formula that factors in an employee’s salary history and years of service. Unlike defined contribution plans such as 401(k)s, where employees bear the investment risk, pensions shift the responsibility of managing investments to the employer. The company funds and manages the plan with the goal of ensuring there’s enough money to pay promised benefits once employees retire.

One of the greatest strengths of pension plans is their predictability. Employees know exactly how much they’ll receive each month, which helps them plan for future expenses with confidence. This guaranteed income can provide enormous peace of mind, especially for retirees who want stability and protection from market fluctuations. Because the employer handles both contributions and investment management, employees don’t have to worry about making complex financial decisions.

The cost and complexity of maintaining a pension plan have led to a steady decline in their use across the private sector. Funding requirements, administrative rules, and long-term financial obligations can be a significant burden for employers. As a result, pensions are now far more common among public-sector workers, such as teachers, police officers, and government employees, where taxpayer funding and long-term planning horizons make these benefits more sustainable.

For employees fortunate enough to have one, a pension provides a steady, lifelong income stream that complements Social Security and other savings. For employers, offering a defined benefit plan can enhance loyalty and retention, particularly in fields where stability and long-term employment are common. Yet for most private companies, newer, more flexible options like 401(k)s and profit-sharing plans prove more attractive than the traditional pension model.

6. Deferred profit-sharing plans

Deferred profit-sharing plans (DPSPs) are employer-funded retirement plans that allow companies to share a portion of their pre-tax profits with employees. Contributions go into individual retirement accounts for eligible workers, and the amount contributed each year is entirely discretionary. This flexibility makes DPSPs appealing to businesses that want to reward employees during good years without committing to fixed annual contributions.

Employers decide how to allocate contributions, often using a formula based on each employee’s salary or total compensation. In 2025, employers can contribute up to $70,000 or 100% of employee compensation to a DPSP per year, whichever is less. Contributions are tax-deductible for the employer and tax-deferred for employees until withdrawal. Profit-sharing contributions can be made in addition to existing 401(k) plans, enhancing employees’ retirement benefits while creating a tangible link between company success and employee rewards.

The biggest advantage of a profit-sharing plan is its adaptability. In profitable years, employers can contribute generously to reinforce motivation and appreciation among staff. In leaner years, contributions can be reduced or skipped altogether without penalties. This flexibility helps businesses align their financial commitments with their actual performance, making DPSPs especially practical for small to mid-sized companies with fluctuating revenue.

7. Employee Stock Ownership Plans (ESOPs)

An ESOP gives workers an ownership stake in the company through shares of stock accumulated over time. These shares are generally held in a trust fund until the employee retires and typically come with no up-front cost to the employee. The employer funds the plan by contributing new shares, buying back existing shares, or contributing cash to purchase shares.

The central idea behind an ESOP is to align employee interests with company performance. Because participants directly benefit from increases in the company’s value, they have a vested interest in working efficiently, supporting growth, and fostering long-term success. When employees retire or leave the company, they can sell their shares, usually back to the company.

ESOPs can alternatively be used for succession planning purposes. Family-owned or otherwise closely-held companies can have the owner(s) sell their shares to the ESOP over time. This provides liquidity for the owner(s) while allowing for a transition to the next generation of ownership at whatever pace is desired. It also ensures that the current owner(s) won’t need to search for a third-party buyer when they want to retire or divest themselves of the business.

From a tax perspective, ESOPs offer several attractive advantages. Employer contributions to the plan are tax-deductible, and employees don’t pay taxes on their shares until they receive distributions. Business owners selling stock to an ESOP can also defer capital gains taxes if the sale meets specific IRS criteria.

However, ESOPs also come with complex regulatory and administrative requirements. To ensure ongoing compliance requirements are met, engaging with external advisors, like attorneys and professional employer organizations (PEOs), is a must. The need to repurchase shares when employees separate from the business can be challenging if the company lacks sufficient liquidity. Annual valuations that determine the fair market value of the stock are also required. These can have tax implications for the business and affect employees by reducing their anticipated retirement funds.

8. 457(b) plans

A 457(b) plan functions much like a 401(k) but is reserved for state and local government employees as well as those who work for certain tax-exempt organizations. Participants contribute a portion of their salary to the plan on a pre-tax basis, and savings grow tax-deferred until retirement. Some 457(b) plans also offer Roth options, giving participants the flexibility to make after-tax contributions and enjoy tax-free withdrawals later on.

Just like a 401(k), a 457(b) plan allows employees to choose from a range of investment options. In some cases, there may be fewer investment options available than for comparable private-sector plans, although this is less common now than in the past. Employers may choose to match a portion of employee contributions, but such contributions count towards the employee contribution limit, unlike with 401(k)s, so this is relatively unusual. One major benefit is that participants can contribute to both a 457(b) and a 403(b) or 401(k) simultaneously if eligible, which allows for higher total annual contributions.

One of the unique features of the 457(b) is its flexibility around withdrawals. Unlike most other retirement plans, there is no early withdrawal penalty if funds are taken out before age 59½, as long as the employee has separated from the employer. This makes the 457(b) particularly advantageous for employees who may retire early or transition careers before traditional retirement age.

9. 403(b) Plans

A 403(b) plan is a retirement savings option designed for employees of public schools, certain non-profit organizations, and some religious institutions. Much like a 401(k), it allows participants to contribute a portion of their salary to a tax-advantaged investment account through payroll deductions. These contributions can be made on a pre-tax basis or into a Roth account.

Certain employees may also have access to a 457(b) plan, letting them increase their total annual contributions. Note that if the employee also has access to a 401(k) plan, any contributions to that plan also count towards the contribution limit of the 403(b) plan, and vice versa. Finally, as with 457(b) plans, investment choices in 403(b) plans may be more limited than those in private industry 401(k)s.

How to Choose the Right Retirement Plan

Selecting the right retirement plan is one of the most important financial decisions an employer or employee can make, and it’s certainly not a one-size-fits-all process. Employers should consider factors such as the size of their business, the number of eligible employees, and the level of administrative complexity they can manage. A small business might prefer a SIMPLE IRA for its ease-of-use, while a larger organization with more resources may choose a 401(k) for its higher contribution limits. The goal is to find a plan that aligns with your business objectives while striking the right balance between benefit, cost, and compliance effort.