Final answer:
Private pension plans that provide a predetermined benefit are called defined benefits plans. They offer a fixed income that, over time, can lose buying power due to inflation. Defined contribution plans like 401(k)s have become more common and offer potential real rates of return to counteract inflation.
Step-by-step explanation:
The private pension plans in which the size of the benefit is precisely known and is usually based on a formula that incorporates factors like years of service and salary are known as defined benefits plans. Retirees who depend on these plans receive a fixed nominal dollar amount per year regardless of inflation. Over time, even with low inflation, this fixed income can lead to a loss of buying power, as a fixed pension does not increase to counteract inflation's effects. Losing 1% to 2% of buying power annually can compound to a significant decrease after a couple of decades.
By contrast, defined contribution plans, such as 401(k)s and 403(b)s, have become more prevalent. These involve regular contributions from employers to the worker's retirement account, which the worker invests. If these investments yield real returns, they can help retirees maintain their buying power against inflation.