Final answer:
Employer-sponsored pension plans have shifted from defined benefit to defined contribution plans, such as 401(k)s, which are portable, tax-deferred, and offer potential real returns mitigating inflation.
Step-by-step explanation:
Unlike government-provided retirement benefits, employer-sponsored pension plans traditionally were defined benefit plans but are now more commonly defined contribution plans. These newer plans, such as 401(k)s and 403(b)s, involve fixed contributions from the employer to an employee's retirement account on a regular schedule. This shifts investment risk from the employer to the employee. The employee, in many instances, also contributes to their retirement plan. A significant advantage of these plans is their portability, allowing employees to take their retirement savings with them if they change jobs. Tax deferral on contributions and the ability to invest in a diversified portfolio of assets can help mitigate the effects of inflation on retirement savings.
Employers offering traditional pension plans must also contribute to the Pension Benefit Guarantee Corporation, ensuring some level of benefits in the event of company bankruptcy. Yet, these traditional plans are giving way to defined contribution plans due to their cost-effectiveness and the financial control they give to employees. As contributions in these plans are invested, they have the potential to yield real rates of return, helping retirees manage the impact of inflation that is less accounted for in fixed pension payouts.