In more detail
A defined-benefit pension promises an income set by a formula, typically years of service × accrual rate × final (or career) average salary, and the employer or state carries the investment risk. A defined-contribution plan such as a 401(k) instead builds a pot whose size depends on contributions and returns. Many pensions reduce the benefit for each year you retire before the normal age, may offer a lump sum instead of the income, and may or may not rise with inflation. Public schemes such as Social Security work similarly but with their own formulas.
Why it matters
Choosing between a lifetime income and a lump sum, or when to retire, can change your total benefit by tens of thousands. The income is usually worth far more than it looks, which matters when comparing job offers or deciding whether to leave before vesting.
Example
30 years at a 1.5% accrual rate on an $80,000 final average salary gives 30 × 0.015 × 80,000 = $36,000 a year. Leaving 3 years earlier with 27 years of service gives $32,400, and a 5%-per-year early-retirement reduction (15%) cuts that to $27,540. Paid for 25 years, $36,000 a year has a present value of $507,382 at a 5% discount rate, a benchmark for any lump-sum offer.
Common confusion
A 401(k) is a defined-contribution account: no income is promised, only what the pot can pay.