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A pension hands the retirement risk to an employer. A business owner has no employer.
When Gramma asked me "So what's your retirement plan?", I had to admit that every piece of that old promise would have to be built by hand, by me. Here is the difference between a pension and self-funded retirement, what the federal data says, and the pieces an owner must fill in.
What is the difference between a pension and a 401(k)?
Who carries the risk.
The Department of Labor puts it simply. A defined benefit plan promises a specified monthly benefit at retirement, either as a fixed dollar amount or through a formula based on things like salary and years of service. A defined contribution plan does not promise a specific amount. The employee will ultimately receive the balance in their account, which reflects contributions plus or minus investment gains or losses.1
| Pension (defined benefit) | Account-based plan (defined contribution) |
|---|---|
| Promises a monthly benefit at retirement | Pays the account balance, no promised amount |
| The plan sponsor carries the investment risk | The account holder carries the investment risk |
| Benefit often tied to salary and years of service | Balance depends on contributions and investment results |
| Mostly employer-run | Employee and employer can both contribute |
How common are pensions now?
Much less common than they were.
The Bureau of Labor Statistics reports that in private industry, access to defined benefit plans fell from 20 percent of workers in 2010 to 15 percent in 2023. Over the same period access to defined contribution plans grew from 59 percent to 67 percent. BLS also notes that no law requires establishments to provide retirement benefits.2
For all retirement benefits combined, 72 percent of private industry workers had access in March 2024, and 53 percent participated.3 That means a large slice of workers have no employer plan at all, and none of these figures describe someone who owns the company.
What does self-funded retirement mean for an owner?
It means you have to build every layer a pension used to provide.
An employee at a company with a plan can often rely on someone else to design the benefit. An owner decides everything: which account to open, how much to put in, when to start and how to handle the risk that comes with investing. The good news is that you have the same kinds of tools employers have. The less good news is that nothing happens unless you act.
Layer one: the paycheck you won't get
A pension converts a career into a monthly check. When you fund your own retirement, you are creating a pool of money and deciding later how to draw on it. That second step, drawing the money down, is a topic for a professional, because it involves taxes, timing and how long you may live.
Layer two: the accounts
The practical start is an account built for you. If you want a map, see the four account types a solo owner can open, which lists the IRS options for self-employed people.
Layer three: the habit
A pension runs on rules. Your plan runs on your behavior. That is why automation and consistency matter so much, and why a cash buffer first keeps you from raiding the account when a bad month hits.
What risks move onto you?
When there is no employer promise, three risks become yours to manage.
Investment risk. In an account-based plan, the DOL notes the balance reflects investment gains or losses, so it can go up or down.1
Inflation risk. Investor.gov points out that a savings account's interest may not keep up with inflation, so a dollar saved today might buy less years from now.5 Money kept only in cash faces this problem.
Habit risk. This is the quiet one. If you skip contributions in a busy year, nothing sends you a reminder, and no payroll system fixes it. The plan only works if you keep it running.
Naming the risks is the first step to handling them. A licensed professional can help you decide which ones matter most in your situation, and what you might do about each.
Jaspreet Singh, who makes personal finance videos for the Minority Mindset channel, warned about relying on one bucket in a video he posted on June 4, 2024:
don't just rely on these retirement accounts to fund your retirement
I read that as a point about single-leg plans, not a reason to skip retirement accounts. Use them, and do not let them be the only thing you have built.
VideoMinority Mindset
The TRUTH About Roth vs. Traditional Retirement Accounts
It is a Roth versus traditional walkthrough, and his view of future tax rates is an opinion, not a fact. Treat it as a starting point for a conversation with your professional.
What if you earned a pension at a past job?
Some owners worked for an employer before going out on their own, and a benefit may be waiting.
- Find the paperwork. Look for old plan statements or enrollment letters from past employers.
- Contact the plan administrator. Ask what benefit you earned, whether you are vested and when you can claim it.
- Ask about your options. Plans differ on timing and payout choices, so get the details in writing.
- Bring it to your professional. A pension you already own changes how much you need to build yourself.
I do not know what you earned, or whether anything is waiting. That is exactly why the call is worth making.
Where does Social Security fit?
It is a piece, not a plan, and the rest of the story is a separate conversation.
When you are self-employed, you pay the tax yourself. The IRS lists the self-employment tax rate as 15.3 percent, consisting of 12.4 percent for Social Security and 2.9 percent for Medicare.4 How much you can expect back, and when to claim it, depends on your earnings record and on laws that can change. Treat it as one leg of the plan, never the only one.
What should an owner do with this?
Turn the comparison into a short checklist.
- Name the gap. If you have no pension and no employer plan, write down what you have built instead.
- Learn the account options. Pick one or two to ask a professional about.
- Fund the buffer first. Cash for emergencies keeps retirement money from being your first line of defense.
- Decide your savings rhythm. Choose an amount and a day, and automate it.
- Review once a year. Revisit your plan during your yearly business review.
I am not saying pensions were better. Some were great, and some were underfunded promises. I am saying the model changed, and owners are at the far end of that change. The sooner you accept that no one is coming to build this for you, the better. The Investing and Retirement hub is where I am laying out the rest.
Educational content, not financial, tax, legal or investment advice. Talk to a licensed professional about your situation.
Keep building.Ekai
Questions people ask
What is the difference between a pension and a 401(k)?
The Department of Labor says a defined benefit plan, or pension, promises a specified monthly benefit at retirement. A defined contribution plan, such as a 401(k), does not promise a specific amount; the employee ultimately receives the balance in their account, which can rise or fall.
How many private-sector workers have a pension?
The Bureau of Labor Statistics reported that 15 percent of private industry workers had access to a defined benefit plan in March 2023, down from 20 percent in 2010. Access to defined contribution plans rose from 59 percent to 67 percent over the same period.
Do self-employed people pay into Social Security?
Yes. The IRS says the self-employment tax rate is 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare.
What happens to a pension I earned at a past job?
It depends on the plan's rules, so ask the former employer or plan administrator what benefit you earned and when it can be claimed. A licensed professional can help you fit it into your plan.
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