by Trent Lorcher

Created on: May 20, 2008   Last Updated: March 23, 2010

A wise man once said, "People who are confused take no action." Perhaps this explains the millions of Americans who have no retirement savings.

Some basic financial education might just provide enough clarity to help American workers take the action necessary to financially prepare for the golden years, and there's no place better to begin than looking at the various retirement plans available in the U.S.

We'll begin with employee-sponsored plans:

Pension: the most common type of defined benefit plan (a plan in which the payout is predetermined) is a pension. With a pension, an employer guarantees the employee a specific amount of money during retirement. A pension is normally paid out in the form of an annuity, and includes different payment options, the most common being a guaranteed payment for life, or a guaranteed payment for life and the life of a spouse.

With most pension plans, the worker becomes vested after 5 years, but this time period can vary depending on the employer. With most pensions, the employee can designate a beneficiary to receive a cash amount in case of premature death.

Due to the high cost of maintenance, and because most people no longer spend their entire career with the same employer, very few companies still offer pensions, the main exception being governments and schools.

Most employee sponsored retirement plans are defined contribution plans (a plan in which the retirement payout is based on the amount contributed and gains and losses of contributions at the time of retirement):

401 (k): 401 (k) plans help employees establish a good financial foundation for retirement. By contributing to a 401 (k), participants reduce their taxable income while growing their retirement savings tax-deferred. Most companies provide an incentive to its employees by matching employee contributions up to a certain percentage. Because 401 (k) contributions are tax free, distributions are considered income and are therefore taxable. Early withdrawals (before the age of 59.5) are also subject to a 10% penalty, although there are some exceptions.

403 (b): a 403 (b) is very similar to a 401 (k) insomuch that participants can make pre tax contributions to their retirement accounts (of up to $15,500 in 2008). A 403 (b) is available to employees of schools, nonprofit hospitals, religious organizations and other tax exempt entities.

Simplified Employee Pension (SEP): a SEP allows an employer to contribute up to 25% of an employee's income into an IRA in the

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