401k, 403b, 457b, TSP, and Pensions - What You Actually Have and How It Works

Most people think their employer plan is a 401k. But in reality, depending on where you work, you might have a defined contribution plan, a defined benefit plan, or both, and each plan works in a completely different way. Understanding which type of plan you have and how it works now and in retirement is important.

This is Part 1 of our retirement accounts series and we are focusing on employer plans this week. Next week we go deeper into IRAs, after that, we will dive into Solo 401k and SEP IRA, and at the end we tie it all together with our consideration when it comes to the "investing order of operations".

Let's get into employer plans:

Defined Contribution Plans: You Fund It, You Own the Outcome

A defined contribution plan is exactly what it sounds like. You and your employer put money in and the balance depends on how those contributions are invested over time.

Here is how we break it down for our clients:

401(k) - This plan is usually offered by most for-profit companies. You elect a percentage of your paycheck, it goes in pre-tax (or Roth), and your employer often matches a portion (closest thing to free money, so make sure you are putting in enough to get the match). The 2026 employee contribution limit is $24,500. If you are 50 or older, add an $8,000 catch-up for a total of $32,500. If you are between 60 and 63, the SECURE 2.0 super catch-up brings your total to $35,750.

403b - Healthcare systems, universities, and religious organizations typically offer this plan. It has the same limits and mechanics of the 401(k), but a key difference is that if your employer also offers a 457b (more on that below), you can max both simultaneously.

457b - This plan is usually offered by government employers and some nonprofits. Here are two things that make this plan unique:

First, if you have both a 403b and a 457b, the contribution limits are completely separate. You can contribute $24,500 to each, putting $49,000 away in a single year before catch-up contributions.
Second, you can withdraw from a 457b after separating from your employer at any age with no 10% early withdrawal penalty. For anyone planning an early retirement, this is something to factor in when thinking about maxing contributions to this account.

TSP (Thrift Savings Plan) - This is the federal government's version of a 401k, available to federal employees and military service members. This plan offers both traditional and Roth options and in 2026, you can now convert your traditional TSP balance to Roth inside the plan, which is a new feature worth knowing about if you are a federal employee thinking through your long-term tax picture.

Game plan for defined contribution plans:

Capture every dollar of your employer match first!!!
Then work toward the IRS limit
If you have access to a 457b alongside a 403b, both limits apply independently; this is one of the most underused advantages in the workplace benefits world.

Defined Benefit Plans: Your Employer Funds It, the Income Is Guaranteed

A defined benefit plan works the opposite way of a defined contribution plan. Your employer controls the investment options. What you receive in retirement is a guaranteed monthly income based on a formula that is usually based on your years of service, your salary, and a multiplier set by the plan.

Interesting fact: only 14% of private sector workers have access to a traditional pension today, down from 60% in the early 1980s, but for the people who still have one, it can completely change their entire retirement picture.

Traditional pension - This type of plan is common in government, education, and certain industries, including oil and gas. If you work at ExxonMobil, for example, the pension formula is 1.6% multiplied by your years of service multiplied by your average pensionable pay over your highest 36 months. If you were to work there for 25 years with an above-average salary, that could be a meaningful monthly income in retirement. Shell and Chevron have similar structures.

The key question for anyone with a traditional pension: do you need guaranteed income in retirement? This is a question we help clients with all the time because some pensions allow you to either take a monthly benefit or a lump sum option, which can be rolled into your 401(k) or IRA. There is no right or wrong answer, but it is worth running the numbers to see what both options look like.

Cash balance plan — This is a "hybrid" that looks like a pension but behaves more like a 401k. Your employer credits your account each year (a set dollar amount plus a guaranteed interest rate) and you can see a running balance. At retirement, you typically have the choice of taking a lump sum, which can be rolled into an IRA or converted to a monthly income stream. Cash balance plans are common at law firms, medical practices, and some large corporations. If you have one just like I mentioned with the pension, it is worth understanding how the lump sum value compares to the annuity option before you make that decision.

Key takeaway for defined benefit plan holders:

Review the type of plan you have
Do you have a rollover option? If you do, run the numbers to see what makes sense for your situation.

Action Items For This Week:

Log into your HR or benefits portal and look at what type of plan you have
Review your contributions and investment allocation
If you have a pension, find out the formula and estimate what your monthly benefit will look like at your expected retirement date

About Legacy Financial Designs

Legacy Financial Designs is a fee-only wealth management firm located in The Woodlands, TX, serving clients in Greater Houston, TX, College Station, TX and virtually across the United States. We provide comprehensive financial guidance and wealth management to families across the country. If you are interested in working with us, click here to schedule an introductory phone call or feel free to call us anytime at 832-510-0175.

This content is for educational purposes only and does not constitute personalized financial or tax advice. Please consult a qualified professional regarding your specific situation.

David Wanja, Jr., CFP®