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While pension plans are less common today than they once were, many workers still receive a pension — a type of retirement plan that provides guaranteed income throughout retirement (or a lump sum at retirement).

Pension plans are known as defined-benefit plans because the benefits the worker will receive during retirement are predictable (i.e., defined). A 401(k) plan, on the other hand, is called a defined-contribution plan — because workers typically contribute a defined amount each month.

Pensions are employer-provided benefits; an individual can’t set up a pension as they would an IRA account. Read on to learn more about what a pension is and how it works.

How to Get a Pension Plan

Unlike other types of retirement plans, such as individual retirement accounts (IRAs), an investor who wants to save for retirement can’t simply fund a pension on their own. Like 401(k) plans, pension plans must be offered by an employer.

While pension plans were once a mainstay of how companies took care of their workers, they’ve become increasingly less common in recent decades. Only a small percentage of private sector and government employers — about 18% — offered some form of pension to their employees as of 2025.

The main reason many companies no longer offer pensions is that it’s generally cheaper for them to offer defined-contribution plans, such as 401(k) or 403(b) plans. That said, if an individual works for the federal, state, or local government, they may be offered a pension.

Among state and local government workers who participate in a retirement savings plan, a majority are in a pension plan.

Recommended: A 4-Step Guide to Planning Retirement

Pension Plans vs. Other Retirement Accounts

The key difference between pension plans and other retirement plans comes down to the difference between a “defined benefit” plan and a “defined contribution” plan.

•   With a defined benefit plan, such as a pension, the amount workers will receive in retirement is typically predictable: for example, $2,000 per month, which is valuable when you’re living in retirement.

•   With a defined contribution plan, such as a 401(k) or similar, employees’ contributions, or savings, are defined: for example, $500 per month. However, a defined contribution plan doesn’t guarantee a fixed benefit amount once the employee retires.

401(k) vs. Pension Plan

Although 401(k) plans and pension plans are both types of tax-deferred accounts that aim to provide workers with income in retirement, they differ in a few ways.

•   Funding and contribution limits

While the employer generally provides the bulk of funding for a pension plan, 401(k) plans are primarily funded by the employee. In some cases, an employer has the option to contribute to the 401(k) through matching funds. (Employers are not, however, required to provide an employer match.)

Another key difference is the annual contribution limit for each type of account.

For tax year 2026, employee contributions to a 401(k) plan are capped at $24,500 per year, with a total limit of $72,000, including employer contributions. (Those 50 and older may contribute additional catch-up contributions.)

The maximum total annual contribution to a pension plan for 2026 is $290,000.

•   Roth designation

There are other points of distinction between pension plans and 401(k) plans. For example, a 401(k) plan may offer a Roth feature (i.e., a Roth 401(k) account), which allows workers to contribute after-tax funds, and take qualified tax-free withdrawals in retirement. Pensions generally do not offer a Roth option.

•   Income and Taxes

As noted, the income from a pension plan is guaranteed, and thus a defined benefit.

But the income from a 401(k), 403(b), or other defined contribution plan depends on the amount the employee has saved over time, and the investments they selected for their portfolio, and how those investments performed.

The income from both a pension and a regular 401(k) is considered taxable income, however.

Pension Plan vs. IRAs

Individuals can also contribute to tax-advantaged IRAs and Roth IRAs. These are also quite different from pension plans.

Traditional and Roth IRAs are individual retirement savings accounts that individuals can set up. (Small businesses may offer a SEP IRA or SIMPLE IRA to employees.)

•   Funding and contribution limits

The annual contribution limits for traditional and Roth IRAs for tax year 2026 is $7,500 per individual, with an extra $1,100 catch-up contribution for those 50 and older.

Since traditional IRAs and Roth IRA plans are self-funded, there is no employer match. Small-business IRAs, like SEP and SIMPLE accounts, may offer an employer match.

•   Roth accounts

The Roth designation refers to the use of after-tax money to fund a retirement account, such as with a Roth IRA. Roth IRA account holders contribute after-tax funds, and qualified withdrawals are tax-free in retirement.

However, pension plans are tax-deferred accounts; the employee pays tax on their pension income in retirement. Typically, defined-benefit plans don’t offer a Roth option.

•   Income

IRA investors can choose the investments in their portfolio. As a result, the ultimate payout from these plans typically depends on the amount saved and the performance, or returns of the investments in the plan.

Traditional IRAs are tax-deferred accounts, so qualified withdrawals are subject to ordinary income tax. And traditional IRA holders must take RMDs, starting at age 73. Roth IRAs are not subject to RMD rules.

One advantage that pensions have over defined contribution plans is that pensions are guaranteed by the federal government through the Pension Benefit Guaranty Corporation (PBGC). It effectively guarantees the benefits of pension-plan participants. But the PBGC does not cover people with defined contribution plans or IRAs.

Managing Your Pension Plan

Workers with pension plans should talk to a representative in their human resources department and find out what the plan offers. Every pension plan is unique. An employee may benefit from looking into the specifics such as:

•   The pension benefit amount

•   Whether it includes health and medical benefits

•   What kind of benefits the pension will offer a surviving spouse or family members.

Someone just starting in their career may also want to ask when their pension benefits vest. In some plans, the benefits may vest immediately, while many others vest in stages, over the course of as seven or more years, which could affect their plans to move on to a new job or company.

One way to help get a better handle on what a pension may pay over time is to inquire about the pension benefit formula. Utilizing that formula is typically how an employer tallies up its eventual contribution to a pension plan based on years of service and what’s known as final average salary, which is the employee compensation rate the pension is based on.

Most often, the formula will use a percentage of the worker’s final average salary, and multiply it by their years of service to determine how much the employee will receive.

Pros of a Pension Plan

Perhaps the biggest advantage of a defined-benefit plan is the guarantee of predictable income in retirement. That’s the core promise that the PBGC protects.

Many pension plans may also include related medical and other benefits for the employee, as well as related benefits for surviving spouses. However those benefits vary widely from plan to plan and are important to investigate.

With a defined-benefit plan, an employee may be able to generally predict the amount they’ll have to live on after they retire, which could help them decide when they can retire. This might help workers plan for other needs, such as supplemental medical insurance or long-term care insurance, in order to better protect themselves down the road.

Cons of a Pension Plan

One downside of a pension plan is that it may give some would-be retirees a false sense of security.

A pension, with its steady income, might lead some people to avoid budgeting for basic living expenses in retirement, or to believe that their expenses will be the same each month, which is not always the case.

As a result, some retirees may not plan for increased overall living expenses due to the effects of inflation in retirement or sudden, unexpected expenses that may crop up.

There’s also the likelihood that their expenses later in life could be significantly higher, especially medical expenses as they get older.

That’s why it can be important to save for retirement in other ways, such as with an IRA, through an online brokerage account, or some other type of retirement savings plan. Just because a worker has a pension, that doesn’t necessarily mean that it’s the only retirement plan that’s right for them.

The Takeaway

Pension plans are a type of retirement savings plan that are offered by some employers that generally guarantee a certain amount of income to workers after they retire. Pension plans are defined-benefit plans, and differ in some key ways from IRAs or 401(k)s. Pensions have become less common in recent decades, and they have pros and cons, like any other financial product. Individuals may want to have other retirement savings plans along with a pension to help build their nest egg.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

What is a pension plan?

A pension plan is a type of defined-benefit retirement plan offered by employers. Pensions are known for providing a guaranteed amount of income to retired workers. But pensions today are much less common, especially for private sector workers, and they have largely been replaced by defined contribution plans like 401(k)s.

How do pension plans work?

Generally, an employer contributes to the pension fund that will pay workers’ income benefits when they retire (in some cases, workers may also contribute to their pensions) and the money is invested. At retirement, the employee receives a guaranteed amount of income, often monthly. Pension income is taxed at ordinary income rates.

What are the different types of pension plans?

Pension plans vary, so it’s important for employees to know what the rules and restrictions of their plan are. For example, a defined-benefit plan uses a basic formula to calculate the amount the employee will receive. A cash-balance plan bases a worker’s payout on the account balance, while still providing a guaranteed income. In addition, some pensions may include insurance or spousal benefits (or not).

How do pension plans compare to 401(k)s and IRAs?

While there are several differences between these accounts, the most important distinction is that pension plans are defined-benefit plans that provide guaranteed income throughout retirement (or a lump sum) for the employee. Defined-contribution plans, like 401(k)s, do not provide guaranteed income, nor do IRAs, which are individual retirement accounts; instead, the account holder takes withdrawals in retirement.

Another important distinction is that an individual can set up a defined contribution plan or IRA and select the investments in their portfolio. But a person cannot join a pension unless they work for a company that offers one.

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Value stocks are shares of companies that have fallen out of favor and are valued less than their actual worth, generally speaking. Growth stocks are shares of companies that demonstrate a strong potential to increase earnings, thereby ramping up their stock price. The terms value and growth refer to two categories of stocks, as well as two contrasting investment “styles”: value may have lower associated risks, with a focus on longer-term returns; growth could be higher risk, with a focus on higher, short-term returns.

Each style has pros and cons. When value investing, investors may buy shares (or fractional shares) of a company that has strong fundamentals at bargain prices. However, investors must be careful not to fall into a “value trap”: i.e., buying stocks that appear to be a bargain, but are actually trading at a discount due to poor fundamentals.

What Are Value Stocks?

Value stocks are stocks that tend to be relatively cheap, or that investors believe aren’t receiving a fair market valuation. In other words, investors think that a stock may be undervalued by the market. Value investors try to identify value stocks by examining quarterly and annual financial statements and comparing what they see to the price the stock is getting on the market.

Investors will also look at a number of valuation metrics to determine whether the stock is lower cost relative to its own trading history, its industry, and other benchmarks, such as the S&P 500 index.

Key Characteristics of Value Stocks

Value stocks tend to have a few underlying characteristics that may lead investors to believe that they’re undervalued.

For example, investors often look at price-to-earnings (P/E) ratio, which is the ratio of price per share over earnings per share. Some experts say that a value stock’s P/E should be 40% less than the stock’s highest P/E in the previous five years.

Investors may also look at price-to-book, which is the price per share over book value per share. A stock’s book value is a company’s total assets minus its liability and provides an estimate of a company’s value if it were liquidated.

Value investors are hoping to buy a quality stock when its price is in a temporary lull, holding it until the stock market corrects and the stock price goes up to a point that better reflects the underlying value of the company.

What Could Make a Stock Undervalued?

There are a number of reasons that a stock could be undervalued.

•   A stock could be cyclical, meaning it’s tied to the movements of the market. While the company itself might be strong, market fluctuations may temporarily cause its price to dip.

•   An entire sector of the market could be out of favor, causing the price of a specific stock to dip. For example, a pharmaceutical company with an effective new drug might be priced low if the health care sector is generally on the outs with investors.

•   Bad press or a negative news cycle could cause share prices to drop.

•   Companies could simply be overlooked by investors looking in a different direction.

Examples of Well-Known Value Stocks

As of September 2026, here are five examples of top-performing value stocks, in no particular order. Remember: there’s no guarantee that any of these stocks, or any stock for that matter, will appreciate.

•   JPMorgan Chase (JPM)

•   ExxonMobil (XOM)

•   Johnson & Johnson (JNJ)

•   Travelers (TRV)

•   Wells Fargo (WFC)

What Are Growth Stocks?

Growth stocks are shares of companies that demonstrate the potential for high earnings or sales. These companies tend to reinvest their earnings back into their business to spur their company’s growth, as opposed to paying out dividends to shareholders.

Growth investors are betting that a company which is growing fast now, will continue to grow quickly in the future. But the risk is that investors jumping into growth stocks may be buying a stock that is already valued relatively high. In doing so, they could lose a potentially significant amount of money if prices tumble in the future.

Key Characteristics of Growth Stocks

To spot growth stocks, investors could look for companies that are not only expanding rapidly but may be leaders in their industry. For example, a company may have developed a new technology that gives it a competitive edge over similar companies.

There are also a number of metrics growth investors could examine to help them identify growth stocks. First, investors may look at price-to-sales (P/S), or price per share over sales per share. Not all growth companies are profitable, and P/S allows investors to see how quickly a company is expanding without factoring in its costs.

Investors may also look at price-to-earnings growth (PEG), which is P/E over projected earnings growth. A PEG of 1 or more typically suggests that investors are overvaluing a stock, while PEG of less than one may mean the stock is relatively cheap. PEG is a useful metric for investors who want to consider both value and growth investing.

Key Differences Between Value and Growth Stocks

The main difference between value and growth stocks mostly concerns their current valuation. As discussed, investors believe that value stocks are undervalued at a certain point in time, and believe the stock could appreciate over time.

Growth stocks, on the other hand, may not be undervalued, but are expected to appreciate relatively quickly over the short or medium term.

With that in mind, some other differences between the two could include relative risk; value stocks may be less risky than growth stocks, which could be more volatile. Further, value stocks may be shares of older more established companies, which could also offer dividends (but have lower earnings growth). The opposite might be true for growth stocks.

Performance in Bull vs. Bear Markets

Given relative risk factors and volatility in relation to growth and value stocks, investors might expect that value stocks would perform better than growth stocks during bear markets. The inverse could be true for bull markets. But again, nothing is guaranteed.

Investment Horizon for Value vs Growth

Investors may also want to consider their strategy and time horizon when deciding whether a value or a growth strategy makes more sense for them.

Specifically, value stocks may be better suited for investors with long-term strategies, while growth may be better for those with shorter time horizons. Naturally, a mix of the two, to some degree, is likely an ideal route for most investors, but it may be worth speaking with a financial professional for guidance.

How Are Growth and Value Strategies Similar?

While growth and value investing are two different investment strategies, distinctions between the two are not hard and fast; there could be quite a bit of overlap. Investors may see that stocks listed in a growth fund are also listed in a value fund depending on the criteria used to choose the stock.

What’s more, growth stocks may evolve into value stocks, and value stocks might become growth stocks. For example, say a small technology company develops a new product that attracts a lot of investor attention. It might start to use that capital to grow its business more quickly, shifting from value to growth.

Investors practicing growth and value strategies also have the same end goal in mind: They want to buy stocks when they are relatively cheap and sell them again when prices have gone up. Value investors are simply looking to do this with companies that are already on solid financial footing, and hopefully, see stock price appreciation should rise as a result.

Growth investors are looking for companies with a lot of growth potential, whose stock price will hopefully rise quickly.

Using Growth and Value Strategies Together

The stock market goes through natural cycles during which either growth or value stocks will be up. Investors who want to capture the potential benefits of each may choose to employ both strategies over the long term. Doing so may add diversity to an investor’s portfolio and head off the temptation to chase trends if one style pulls ahead of the other.

Investors who don’t want to analyze individual stocks for growth or value potential could access these strategies through growth or value mutual funds. Because of the cyclical nature of growth and value investing, investors may want to keep a close eye on their portfolios to ensure they stay balanced – and consider rebalancing their portfolio if market cycles shift their asset allocation.

Balancing Risk With Growth and Value Investments

As noted, it may be a good strategy to find some sort of balance between value and growth assets in your portfolio. This adds a degree of diversification, naturally, but given your personal risk tolerance and time horizon, there may be advantages to balancing your portfolio more toward growth or value – it’ll depend on your specific situation.

Again, this may be worth a conversation with a financial professional, who could possibly help with some additional guidance. But given prevailing, changing market conditions and more variables, it might also be a good idea to regularly check in and rebalance your portfolio.

The Takeaway

Growth and value are different strategies for investing in stocks. Investing in growth stocks is considered a bit riskier, though it also may provide potentially higher returns than value investing. That said, growth stocks have not always outperformed value stocks. Value stocks may be purchased for less than they’re worth, tend to be lower risk, and may offer investors some appreciation over time.

As a result, some investors may choose to build a diversified portfolio that includes each style so they have a better chance of reaping benefits when one is outperforming the other.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

What is the main difference between value and growth stocks?

Value stocks are considered to be undervalued by investors, whereas growth stocks have an expectation of short-term growth or appreciation.

Can growth stocks turn into value stocks over time?

Yes, growth stocks may turn into value stocks over time, and value stocks may turn into growth stocks. They are fluid, in that sense.

How could beginners balance growth and value investments?

Perhaps the easiest way for beginners to balance growth and value investments is to diversify their portfolios through index or mutual funds, which may include a mix of both types of investments.

Which strategy works better in a recession?

While nothing is guaranteed or for certain, it may be a better bet to stick to a value strategy during a recession or economic downturn, as value stocks tend to have less volatility and risk than growth stocks.

How do dividends impact value and growth stocks?

Many growth stocks may not offer dividends, as those companies may instead be focused on growth and reinvesting their profits. Value stocks, on the other hand, tend to offer dividends, as they’re not necessarily in “growth mode,” and are in the practice of returning value to shareholders.

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An equal-weight index gives each constituent in a market index the same weight versus a market-cap-weighted or price-weighted index, where bigger companies (or those trading at higher prices) hold a larger share of the index.

Equal weighting strives to equalize the impact of each company’s performance on the overall index. Traditional market-cap weighting tends to give bigger companies more influence over outcomes. Equal-weight investing is a smart beta strategy that may appeal to certain types of investors more than others.

What Is an Equal-Weighted Index?

A stock market index tracks the performance of a specific group of stocks or a particular sector of the market. For example, the S&P 500 Composite Stock Price Index tracks the movements of 500 companies that are recognized as leaders within their respective industries.

Stock market indexes are often price-weighted or capitalization-weighted.

•   In a price-weighted index, the stocks that have the highest share price carry the most weight. In a capitalization-weighted index, the stocks with the highest market capitalization carry the most weight.

•   Market capitalization represents the value of a company as measured by multiplying the current share price by the total number of outstanding shares.

While some investors may wish to invest in stocks, others may be interested in mutual funds or index funds, which are like a container holding many stocks.

How Equal Weighting Works

An equal-weighted index is a stock market index that gives equal value to all the stocks that are included in it. In other words, each stock in the index has the same importance when determining the index’s value, regardless of whether the company is large or small, or how much shares are trading for.

An equally weighted index essentially puts all of the stocks included in the index on a level playing field when determining the value of the index. With a price-weighted or capitalization-weighted index, on the other hand, higher-priced stocks and larger companies tend to dominate the index’s makeup – and thereby dictate or influence the overall performance of that index.

This in turn influences the performance of corresponding index funds, which track that particular index. Because index funds mirror a benchmark index, they are considered a form of passive investing.

Most exchange-traded funds (ETFs) are passive funds that also track an index. Now there are a growing number of actively managed ETFs. While equal-weight ETFs are considered a smart beta strategy, they aren’t fully passive or active in the traditional sense. These funds do track an index, but some active management is required to rebalance the fund and keep the constituents equally weighted.

Examples of Equal-Weight Funds

Equal-weight exchange-traded funds (ETFs) have grown more common as an increasing number of investors show interest in equal-weight funds. Equal weight falls under the umbrella of smart-beta strategies, which refers to any non-market-capitalization strategy.

The term “smart beta” doesn’t mean a particular strategy is better or more effective than others.

Equal-weight funds, for example, are designed to shift the weight of an index and its corresponding funds away from big-cap players, which may unduly influence the performance of the index/fund. And while an equal-weight strategy may have improved fund performance in some instances, the results are not consistent.

Here is a list of some of the top five equal-weight ETFs by assets under management (AUM):

1.    Invesco S&P 500 Equal Weight ETF (RSP)

2.    SPDR S&P Biotech (XBI)

3.    FT Vest Laddered Buffer ETF (BUFR)

4.    Invesco S&P 500 Equal Weight Technology ETF (RSPT)

5.    State Street SPDR S&P Aerospace & Defense ETF (XAR)

How to Calculate Equal-Weighted Index

To calculate equal weighted index, you need to know two things:

•   The share price of each stock that’s included in the index

•   Total number of stocks included in the index

If you’re calculating an equally weighted index value for an index that has five stocks in it, each one would be weighted 20%, regardless of its stock price or market capitalization. To find an equal-weighted index value, you would simply add the share price of each stock together, then multiply it by the weight.

So for example, say an index has five stocks priced at $100, $50, $75, $90 and $85. Each one would be weighted at 20%.

Following the formula, you would add each stock’s price together for a total of $400. You’d then multiply that by the 20% weighting to arrive at an equal-weighted value of 80.

As fund turnover occurs and new assets are exchanged for old ones, or as share prices fluctuate, the equally weighted index value must be recalculated.

The equally weighted index formula could be used to determine the value of a particular index. You may want to do this when determining which index ETF to invest in or whether it makes sense to keep a particular index mutual fund in your portfolio.

Advantages of Using an Equally Weighted Index

An index investing strategy might be preferable if you lean toward more conservative investments or you simply want exposure to a broad market index without concentrating on a handful of stocks. That’s something you’re less likely to get with mutual funds or ETFs that follow a price-weighted or capitalization-weighted index.

Here are some of the reasons to consider an equal-weighted index approach:

•   An equal-weight strategy might increase diversification in your portfolio while potentially minimizing exposure to risk.

•   It’s relatively easy to construct an equally weighted portfolio using index mutual funds and ETFs.

•   It may appeal to value investors, since there’s less room for overpriced stocks to be overweighted and undervalued stocks to be underweighted.

•   Equal-weighted index funds may potentially generate better or more incremental returns over time compared to price-weighted or capitalization-weighted index funds, but there are no guarantees.

Disadvantages of Using Equally Weighted Index

While there are some pros to using an equal weighted approach, it may not always be the best choice depending on your investment goals. In terms of potential drawbacks, there are two big considerations to keep in mind:

•   Equal-weighted index funds or ETFs that have a higher turnover rate may carry higher expenses for investors.

There is typically a constant buying and selling of assets that goes on behind the scenes to keep an equal-weighted mutual fund or ETF in balance.

Higher turnover ratios, or, how often assets in the fund are swapped in and out, could lead to higher expense ratios if a fund requires more active management. The expense ratio is the price you pay to own a mutual fund or ETF annually, expressed as a percentage of the fund’s assets. The higher the expense ratio, the more of your returns you hand back each year to cover the cost of owning a particular fund.

•   Equal-weighted indexes might also be problematic in bear market environments, which are characterized by an overall 20% decline in stock prices. During a recession, cap-weighted funds may outperform equal-weighted funds if the fund is being carried by a few stable, larger companies.

◦   Conversely, an equal-weighted index or fund may miss out on some of the gains when markets are strong and bigger companies outperform.

The Takeaway

In an equal-weight index, each stock counts equally toward the index’s value, regardless of whether the company is large or small, or what shares are currently trading for. The same is true of any corresponding fund.

There are advantages to investing in an equal-weight index fund over a capitalization-weighted index or price-weighted index. For example, equal-weighted indexes may generate better or more consistent returns. Investing in an equal-weight index may be appealing to investors who prefer a value investing strategy or who want to diversify their portfolio to minimize risk.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

How do equal-weight ETFs work?

Like an equal-weight index, an equal-weight ETF holds the same proportion of each of its constituents, which in theory may equalize the impact of different companies’ performance.

When should you buy equal-weighted ETFs?

If you’d like to invest in a certain sector, but you don’t want to be riding the coattails of the biggest companies in that sector because you see the value in other players, you may want to consider an equal-weight ETF.

What is the equally weighted index return?

The return of an equally weighted index would be captured by the performance of an investment in a corresponding index fund or ETF. So if you invest $100 in Equal Weight Fund A, which tracks an equal weight index, and the fund goes up or down by 5%, you would see a 5% gain or loss.

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You may also be interested in:

Value-Weighted Index: Explanation and How to Calculate

Understanding The Stock Market Index

The S&P 500 Explained and Defined

It’s easy to forget about an old 401(k) plan when changing to a new job because it’s such a busy time. But by not rolling over your 401(k), you might be losing some serious cash.

Read on to learn some key reasons to prioritize a 401(k) rollover — and how to transfer a 401(k) to a new job.

Why Should I Consider Moving My 401(k)?

Rolling over a 401(k) may have some significant benefits. For example, if your new employer’s plan offers a broader range of investment choices, moving a 401(k) might gain you access to investment vehicles that better align with your financial goals.

Not only that, if you leave your 401(k) where it is, you may forget about it. There are 31.9 million forgotten 401(k) accounts in the U.S., according to one 2025 estimate. By rolling over a 401(k) to a new plan, you’ll know where your money is.

Also, when you forget about a 401(k), your portfolio may no longer have your desired asset allocation as time goes on. It’s generally important to keep tabs on investments to ensure they are on track and appropriate for your time horizon and goals.

And finally, leaving your 401(k) may cost you in fees. Here’s why: Certain fees go into effect when you open a 401(k), which typically include administrative, investment, and custodial fees. Employers may cover some of these fees until you leave the company. Once you’re gone, that entire cost might shift to you.

If the fees are high, rolling over a 401(k) to a plan with your new employer that has lower fees, or to a traditional IRA, may be advantageous.

Recommended: IRA Deduction Rules

4 Options For Your 401(k) When You Change Jobs

When you get a new job and you have a 401(k) from your previous employer, you have several options to consider, including the following:

1. Leave It With Your Former Employer

You aren’t required to roll over your 401(k) to a new employer’s plan. If you have more than $7,000 in the old 401(k) account, you can leave the funds where they are. But keep in mind that you will no longer be able to make 401(k) contributions to the account.

What happens to your 401(k) when you leave your job and you have between $1,000 and $7,000 in your account is that your former employer may not allow you to keep it there. Instead, they might roll over the 401(k) into an IRA in your name. If you have less than $1,000 in your 401(k), the employer will often cash out the funds and send you a check for the amount.

2. Roll Over a 401(k) to Your New Employer’s Plan

If your new employer offers a 401(k) plan and you are eligible to participate, you can roll the money over from your old plan to the new plan as long as the plan allows it. Consolidating your 401(k)s could help you manage all of your retirement savings in one place.

The process to move a 401(k) to a new employer is usually relatively simple. You can request that the 401(k) administrator at your old company move the funds into your new employer’s plan through what’s known as a direct transfer (see more about this below).

3. Roll Over a 401(k) to an IRA

An IRA is another option for your 401(k) funds. A rollover IRA can give you more control over your investment options, and you can do it through a direct transfer of funds from your old employer to a new IRA account you set up.

If you choose to roll over the money into a Roth IRA or traditional IRA you can make annual contributions. In 2026, individuals under age 50 can contribute up to $7,500 in an IRA, and those 50 and older can contribute up to $8,600.

The type of IRA you open typically depends on whether you have a traditional 401(k) or a Roth 401(k). If you have a Roth 401(k) you’ll need to roll it over into a Roth IRA.

You can open an IRA online and roll over your 401(k) into it. Just keep in mind that IRAs don’t come with employer-provided benefits, such as matching contributions.

Recommended: IRA Transfer vs Rollover

4. Cash Out Early

You can also choose to cash out your 401(k). However, if you’re younger than 59 ½, you will typically have to pay taxes on the money, and perhaps an additional 10% early withdrawal penalty.

Under some qualifying circumstances, the 10% fee may be waived, such as when the funds will be used for eligible medical expenses. But if there are no qualifying circumstances in your situation, think carefully about cashing out your 401(k) to make sure it’s the right choice for you.

Pros and Cons of Transferring a 401(k) to a New Job

Rolling over your 401(k) to your new employer’s plan has potential benefits and drawbacks. Here are the possible advantages and disadvantages to consider.

Pros:

•   More convenience. Transferring your 401(k) to your new employer’s plan can consolidate your tax-deferred dollars into one account. Keeping track of and managing one 401(k) account may simplify your money management efforts.

•   Streamlining investment decisions. Not only does consolidating your old 401(k) with your new 401(k) make money management more straightforward, it can also streamline your investments. Having one account may make it easier to coordinate your investment strategies, target your asset allocations, monitor your progress, and make any adjustments as needed.

•   Maintaining the value of the account. With a direct rollover, there are no taxes or penalties to pay. The funds are typically moved tax-free.

Cons:

•   Loss of certain investment options: Your new employer’s plan may offer different investment options than your old plan, and you may lose some options you liked. The new plan might also offer fewer investment options, limiting your ability to diversify your portfolio.

•   Increased fees: The new employer’s plan may have higher fees associated with it, which could eat into your investments over time.

•   Possible plan restrictions: Some employer 401(k) plans don’t allow rollovers or they might have a waiting period.

How to Roll Over Your 401(k) to a New Employer

If you’ve decided to roll your funds into your new employer’s 401(k), these are the steps to take:

1.    Contact your new plan’s administrator to get what’s known as the account address for the new 401(k) plan, and then give that information to your old plan’s administrator.

2.    Complete any necessary paperwork required by your old and new employers for the rollover.

3.    Request that your former plan administrator send the funds directly to the new plan via a direct rollover.

You could also have them send a check to you, which you then give to the new plan’s administrator, but you will need to send the money to the new plan administrator within 60 days of receipt or you might face taxes and penalties.

4.    Confirm that the money arrived in the new 401 (k) and choose investments.

Recommended: Rollover IRA vs. Traditional IRA: What’s the Difference?

The Takeaway

There are benefits to rolling over a 401(k) after switching jobs, including streamlining your retirement accounts and making it easier to manage them. You may choose to roll over your 401(k) into a new employer’s plan, or into an IRA that you manage yourself, which might give you more investment options to choose from. Be sure to weigh the pros and cons of the different choices, and perhaps consult a financial professional, to help decide which option may be best to help you save for retirement.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

How long do I have to move my 401(k) after leaving a job?

If the balance in your 401(k) is $7,000 or more, you can typically leave it there as long as you like. However, if you choose to roll over the 401(k) through an indirect rollover, you generally have 60 days from the date of distribution to deposit the funds into the new 401(k) or an IRA. Otherwise, it may be considered a taxable distribution and may be subject to penalties.

If your 401(k) balance is less than $7,000, your former employer may not allow you to leave it there and might roll it over into an IRA. If the balance is less than $1,000, they may cash it out and send you a check for the amount.

What happens to my 401(k) if I am fired?

If you’re fired, you will still have access to the money you’ve contributed to your 401(k) as well as the fully vested employer contributions. And as long as you have more than $7,000 in the account, you’ll generally have four options: You can keep the 401(k) where it is, roll it over to your new employer’s plan, roll it over to an IRA, or cash it out. If you have less than $1,000 in your 401(k), your employer may close the account and send you a check for the amount you had in it.

Do I have to pay taxes when moving a 401(k)?

You generally don’t have to pay taxes when moving a 401(k) as long as you do a direct rollover into another tax-deferred account like an employer’s 401(k) or a traditional IRA. However, if you do an indirect rollover in which the funds are sent to you, you typically have 60 days from the date you receive the funds to deposit them into the new account. Otherwise, the funds may be considered a distribution and they’ll be subject to taxes and penalties if you are under the age of 59 ½.

Can I merge multiple old 401(k)s into one account?

You can generally merge multiple old 401(k)s into a single account by rolling them over into an IRA. You may also be able to roll old 401(ks) into your current employer’s plan, as long as the plan allows it. Check with the plan administrator.

Are there penalties for cashing out a 401(k) early?

If you’re younger than age 59 ½, there are penalties for cashing out a 401(k) early. An early cash-out of a 401(k) will typically trigger federal, state and local income taxes. Plus, you may also be subject to a 10% early withdrawal penalty from the IRS (the penalty may be waived in some circumstances, such as certain financial hardships).

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An investment risk pyramid is an illustration used to help investors understand the risk/reward profile of various assets. The investment risk pyramid uses a base, middle, and top to rank investments by the likelihood of losing money or seeing big returns. The tool is useful when getting started with investing.

Building a portfolio is no easy task. It requires due diligence and an assessment of your risk tolerance and return goals. The investment risk pyramid may help you determine what approaches work best for you.

What Are Investment Pyramids?

Investment pyramids are practical tools for gauging how risky certain asset types are. The pyramid model has been used in many areas for a long time, and it’s useful when learning what your risk tolerance is.

An investment risk pyramid has three levels grouped by risk/return profile. The least-risky securities are found in the large base; growth and moderately risky assets are in the middle; then the most speculative strategies are at the top.

Again, this could be helpful to investors who are looking to buy and sell stocks or other securities, and also get a sense of how much associated risk they’re introducing or jettisoning from their portfolio.

How Investing Pyramids Work

There are many investing risk need-to-knows, and the pyramid of investment risk works by helping investors understand the connection between their asset allocation and their risk tolerance.

The visual should ultimately lead individuals to better grasp what percentage of their investable assets should go to which types of investments based on risk level and return potential.

Using a risk pyramid investment strategy provides a basic framework for analyzing portfolio construction. The investment risk pyramid is structured so that it suggests people hold a higher percentage of lower-risk assets, and relatively little in the way of ultra-high-risk, speculative assets.

Base of the Pyramid

Managing investment risk is among the most fundamental aspects of investing, and risk is controlled by ensuring an allocation to some safe securities. The base of the investment risk pyramid, which is the bulk of total assets, contains low-risk assets and accounts. Investments such as government bonds, money markets, savings and checking accounts, certificates of deposit (CDs), and cash are included in the base.

While these securities feature relatively low risk, you might lose out to inflation over time if you hold too much cash, for example.

Middle of the Pyramid

Let’s step up our risk game a bit by venturing into the middle of the investment risk pyramid. Here we will find medium-risk assets. In general, investments with some growth potential and a lower risk profile are in this tier. Growth and income stocks and capital appreciation funds are examples.

Other holdings might include real estate, dividend stock mutual funds, and even some higher-risk bond funds.

Top of the Pyramid

At the top of the investment risk pyramid is where you’ll find the most speculative asset types and even margin investing strategies. Options, futures, and collectibles are examples of high-risk investments.

You will notice that the top of the pyramid of investment risk is the smallest – which suggests only a small portion of your portfolio should go to this high-risk, high-reward niche.

Sample Investment Pyramid

Here’s what a sample investment risk pyramid might contain:

Top of the pyramid, high risk: Speculative growth stocks, put and call options, commodities, collectibles, cryptocurrency, and non-fungible tokens (NFTs). Generally, just a small percentage of an overall portfolio should be allocated to the top of the pyramid.

Middle of the pyramid, moderate risk: Dividend mutual funds, corporate bond funds, blue-chip stocks, and variable annuities. Small-cap stocks and foreign funds can be included, too. A 30-40% allocation could make sense for some investors.

Base of the pyramid, low risk: U.S. government Treasuries, checking and savings accounts, CDs, AAA-rated corporate bonds. This might comprise 40-50% of the portfolio.

Pros and Cons of Investment Pyramids

The investment risk pyramid has advantages and disadvantages. Let’s outline those to help determine the right investing strategy for you.

Pros

The investment risk pyramid is useful as a quick introduction to asset allocation and bucketing. Another upside is that it is a direct way to differentiate asset types by risk.

Cons

While the investment risk pyramid is helpful for beginners, as you build wealth, you might need more elaborate strategies beyond the pyramid’s simplicity. Moreover, in the end, you determine what securities to own – the pyramid is just a suggestion.

Examples of Low-Risk Investments

Let’s describe some low-risk investments in more detail since these are including the investment risk pyramid’s biggest tier.

Bonds

Bonds are essentially a loan you make to the government or other entity for a set amount of time. In return for lending your money, the debtor promises to pay you back at maturity along with periodic coupon payments, like interest.

Lower-risk bonds include short-term Treasury bills while riskier bonds are issued by speculative companies at a higher yield.

Cash

Cash feels like a low-risk asset, but ideally you would store it in an interest-bearing savings account in order to keep up with inflation.

Also consider that holding too much cash can expose you to inflation risk, which is when cash loses value relative to the cost of living.

Bank Accounts

You might earn a rate of return through a bank account with FDIC insurance. Keeping an emergency fund in a checking account can be a prudent move so you can pay expenses without having to sell assets like stocks and bonds or take on debt.

Examples of High-Risk Investments

At the top of the pyramid, you will find assets and strategies that may generate large returns, but also expose you to serious potential losses. Margin trading is a method often employed by some investors to try and increase their returns.

Margin Trading

Margin trading is using borrowed funds in an attempt to amplify returns. A cash account vs. margin account has key differences to consider before you go about trading. Trading with leverage offers investors the possibility of large short-term gains as well as the potential for outsize losses, so it is perhaps best suited for sophisticated investors.

Options

Options on stocks and exchange-traded funds (ETFs) are popular these days. Options, through calls and puts, are derivative instruments that offer holders the right but not the obligation to buy shares at a specific price at a predetermined time. These are risky since you can lose your entire premium if the option contract strategy does not work out for the holder.

Collectibles

Collectibles, such as artwork or wine, are alternative investment types that may provide some of the benefits of diversification, but it’s hard to know what various items are worth since they are not valued frequently. Consider that stocks and many bonds are priced at least daily.

Collectibles might also go through fad periods and booms and bust cycles, which could add to the risk factors in this category.

Discovering Your Risk Tolerance

The investment risk pyramid is all about helping you figure out your ability and willingness to accept risk. It is a fundamental piece of being an investor. You should consider doing more research and even speaking with a financial advisor for a more detailed risk assessment along with an analysis of what your long-term financial goals are.

The Takeaway

Using an investment risk pyramid may make sense for many investors. It’s an easy, visual way to decide which asset classes you might want to hold in your portfolio, so that the percentage of each (i.e. your asset allocation) is aligned with your risk tolerance.

The other helpful aspect of the investment risk pyramid is that it presumes a bigger foundation in lower-risk investments (the bottom tier), with gradually smaller allocations to moderate risk and higher-risk assets, as you move up the pyramid. This might be helpful for a long-term strategy. In a nutshell, the investment risk pyramid helps you figure out how to allocate investments based on your risk tolerance and return objectives.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

FAQ

What are the levels of an investment pyramid?

The levels of an investment risk pyramid are low-risk at the base, moderate-risk in the middle, and high-risk at the top. The risk/return investment pyramid helps investors understand how to think about various assets they may want to own.

What does investment risk refer to?

Investment risk can be thought of as the variance in return, or how great the chance is that an investment will experience sharp losses. While the risk investment pyramid helps you build a portfolio, you should also recognize that a diversified stock portfolio performs well over time, while cash generally loses out due to the risk of inflation.

What are some examples of high-risk investments?

High-risk investments include speculative assets like options, trading securities on margin, and even some collectibles that might be hard to accurately value since they are based on what someone might be willing to pay for them. The low-risk to high-risk investments pyramid can include virtually any asset.

Photo credit: iStock/MicroStockHub

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