When you become a member of a pension plan, by law, your employer must give you a summary plan description in a pension booklet. In this booklet, you will find the type of plan you have, the method used to calculate the pension, and the amount invested on your behalf.

There are two types of plans: defined-benefit and defined-contribution.

A defined-benefit plan (DB) is the traditional type of pension that specifies the benefit income that you will receive in retirement based on how long you have worked for the company, your age at retirement, and how much you earned. The employer then contributes a set amount that will make the benefit possible.

Your pension booklet will describe the method used to calculate the pension. DB plans generally are calculated in one of two ways. With the first method, a percentage of your pay is multiplied by the number of years you have worked. The amount of pay used in the calculation often is an average of your last three to five years of work. For example, if the percentage is 2 percent, your average pay is $20,000, and you worked for 20 years, your pension would be equal to $8,000 per year, or $666 per month.

With the second method, you are allowed a flat dollar amount per month for each year covered by the plan. For example, a payment of $50 per month times 20 years of service is equal to $12,000 per year, or $1,000 per month.

The advantages of the DB plan are:

• The employer is responsible for contributing to the plan.

• The employer bears the risk of bad investments.

• Your benefits are guaranteed by the government's Pension Benefit Guaranty Corporation (PBGC) to be paid even if the company has underfunded its plan.

• Contributions to this account will grow tax-deferred (you do not pay taxes on them until you withdraw the money).

• You are guaranteed a specific payment as long as you live. The DB plan is of most benefit to workers who stay with the company for many years.

• Fewer than 5 percent of DB plans are adjusted annually for inflation.

• The benefits will not move with you to a new job.

• Employees usually cannot make contributions to their accounts.

Employers are turning to DC plans for employee pensions because they are less expensive for the employer than DB plans. DC plans have many options and alternatives.

The employer can:

• contribute a percentage of your pay (if it is a money-purchase plan)

• contribute an optional percentage of the company's profits (if it is a profit-sharing plan) or match your contributions up to a certain percentage

• pay the expenses of the plan, thereby increasing the purchasing power of your contributions

• provide a 401(k) or 403(b) plan

• offer employee stock ownership plans (ESOPs)

• provide a simplified employee pension (SEP)

• the performance of the investments

• the level of contributions by employee and employer

• the number of years worked

• Contributions to this account will grow tax-deferred until they are withdrawn.

• Benefits may be "portable" when you move to a new job.

• The employee has some control over where her money is invested.

• The employer often matches the employee's contribution up to a certain amount (a great advantage). The pension booklet for a DC plan describes how the employer match is computed.

• It is not guaranteed by PBGC (you are not guaranteed against loss if the company goes out of business or was underfunded) but is covered by ERISA (for fairness).

• The employee assumes the risk that the employer's contribution, plus earnings on the contributions, will provide an adequate retirement income. Generally, an employer may contribute up to 25 percent of the employee's salary, not exceeding $30,000 per year, for money-purchase plans and up to 15 percent of the employee's salary, not exceeding $30,000, for profit-sharing plans.

• If the employer doesn't match the employee's contribution, the employee will actually get a smaller compensation package than if he or she had a defined benefit plan. In effect, employees are given the burden and risk of saving for their own retirement without contributions previously made on their behalf by the employer.

• The employer makes no contribution for an employee who does not contribute (participate), so that employee earns no pension. Had she been participating in a defined benefit plan, she would have had a pension.

• Although employees have some control over investments, most invest more conservatively than professional pension plan administrators so earn less benefits.