Personal Financial Planning Practice Test

Employer-sponsored pensions typically provide retirement benefits that are heavily influenced by an employee's average salary and the duration of their employment, known as tenure. This characteristic means that the pension amount is calculated using a formula that considers how long the employee worked for the company and what their salary was during that time.

This system is designed to reward long-term service and loyalty, encouraging employees to remain with the company until they retire. The relationship between salary, tenure, and benefits is a fundamental aspect of defined benefit plans, which many employer-sponsored pensions fall under.

Other characteristics of employer-sponsored pensions may vary. For instance, while some pensions involve employee contributions, not all require them. Additionally, pensions typically do not guarantee a lump-sum payment at retirement; instead, they often provide a monthly annuity based on the defined benefit formula. Finally, employer-sponsored pensions are not exclusive to government employees; many private sector employers also offer such plans. Thus, the link between the pension benefits, average salary, and tenure is pivotal and correctly identifies a key characteristic of these retirement plans.