Final answer:
A pension plan becomes contributory when both the employer and employee make payments, which are invested for retirement. Modern retirement savings have shifted towards defined contribution plans like 401(k)s, which are tax deferred and portable, and offer inflation protection. Pensions are also somewhat insured through the Pension Benefit Guarantee Corporation.
Step-by-step explanation:
A pension plan is considered contributory when both the employer and employee make payments to a funding agency. These payments are saved and invested to provide retirement income to the employee. Traditionally, pensions were more common where employers fully funded the retirement plan; however, in more recent times, defined contribution plans such as 401(k)s and 403(b)s have become the norm.
In these defined contribution plans, the employer contributes a fixed amount to the employee's retirement account regularly, often every paycheck. Similarly, employees usually contribute a portion of their earnings. These contributions are then invested in a variety of investment vehicles. A significant advantage of defined contribution plans is that they are tax deferred and portable, allowing employees to take their retirement savings with them if they change employers. Additionally, these investments, if well-managed, can offer protection against inflation, which is a drawback of traditional pension plans.
In the case of company bankruptcy, pension plans are insured to some extent by the Pension Benefit Guarantee Corporation, ensuring some level of payment to retirees notwithstanding a company's inability to pay out pensions.