(FORTUNE Magazine) – Once upon a time in the world inhabited by our parents, people spent most of their adult lives working for one or two companies. In return for such loyalty, many employers provided lavish pensions, often amounting to 50% to 65% of preretirement salary. Modest personal savings and a big Social Security check made the transition to retirement oh so smooth and financially painless.

There are people who continue to bask in the generosity of that era. Paul Kaneshiro, 64, is still young enough to get over 150 yards from his eight iron and still old enough to recall that Sunday morning in December 1941, when, as an 8-year-old boy growing up outside Honolulu, he thought the U.S. military was putting on an exhibition for kids like him. That exhibition turned out to be Japan's attack on Pearl Harbor. After serving in the Army during the Korean war, he quickly tired of picking pineapples and left Hawaii to attend the Polytechnic Institute in Brooklyn, where he used the GI Bill to earn a bachelor's degree in civil engineering and a master's degree in transportation planning and engineering. He later signed on with New York City's department of traffic in 1960, eventually winding up as its deputy assistant commissioner.

Last November, Kaneshiro retired, and when he did, his fixed pension benefit was calculated by awarding him 2.2% of his final salary for each of his first 25 years and 1.7% for each of his final 11 years. As part of a program to get older, high-level civil service employees off the payroll, the city sweetened Kaneshiro's package by an additional 5% of his 1996 salary as an incentive. The result: He is now receiving a pension equivalent to more than 75% of his last year's salary. And he's amused by some of the oldsters still working for the city in their 70s, who would actually get 10% raises if they were to retire.

Today, Kaneshiro's lush retirement pension seems as au courant as a Norman Rockwell painting. The fact is, they just don't make pensions like that anymore, and the once popular image of a paternalistic world in which your employer took care of you has, for the most part, faded away. Sure, some people working in the public sector or at a handful of large companies like Motorola, Ford, and Exxon continue to receive hefty pension checks, but their ranks are slowly, surely shrinking.

The argument over what derailed the social contract of the post-World War II era--leading suspects include global competition and technology--is academic. If you're like most Americans, the reality is that you will have to provide the preponderance of your own retirement income.

But while traditional pensions may no longer be the bulwark of the nation's retirement savings system, they are still footing an enormous chunk of its retirement bill. According to a 1994 report by the Pension and Welfare Benefits Administration, about 25 million private-sector workers were still covered by defined-benefit plans; 14 million of them also had 401(k)s. Big companies are the most likely to offer defined-benefit plans: A survey of 1,050 major employers by Hewitt Associates found that 79% did so.

If they are so prevalent, why are pensions such a convoluted mystery to the very people they are supposed to help: dusty, neglected weapons in their financial arsenals? There are several reasons. The vast majority of these plans don't have, as a 401(k) does, an easily accessible account value: Tracking down the worth of your pension is likely to result in a lengthy bout of phone tag with your human resources department. Then there's all the actuarial jargon these benefit formulas rely on. Once you get hold of your company's plan, you're likely to find yourself confused by its tortuous workings. For example, after you do nail down the value of your future pension, there's the ugly but true fact that it's likely to be reduced by your Social Security income. Figuring that out involves another round of phone calls. Who has the time?

But once broken down to their core components, defined-benefit plans can be simple to get your arms around. Chances are your company pension, assuming it has one, is a final-average-pay or highest- average-pay plan, the most common variety. If so, count yourself lucky, because they are usually the most generous of plans. These pensions provide a payout based upon either the average compensation of an employee's final three or five years at the company or--even better--the average of their highest-income years multiplied first by a benefit percentage and then by a "credited service factor," typically their length of service.

Here's an example of how it works: A standard plan would take a benefit percentage, say, 1.25%, and multiply that by the employee's years of service, say 30 years. The result of that simple multiplication is a larger percentage, in this case 37.5%, which is then applied to an average of the employee's five best years of pay. Thus, 37.5% of a final average salary of, say, $150,000 produces an annual pension of $56,250.

If you spend less than 30 years at a company, you still get a pension, but a lesser one. Based on the example above, an employee retiring with only 15 years of service would get an annual pension of $28,125 (1.25% x 15 x $150,000).

The benefit percentage changes from company to company, but if you spend 30 years with one employer, expect a monthly check of between 30% to 45% of your final average pay. Some companies still offer a generous 1.5% or 2.0% per year of employment, but that practice, common in the post-World War II years, is on the wane.

In fact, companies have grown increasingly chintzy with the terms of their plans. In recent years, for example, many plans have started maxing the benefit out at 50% of an employee's highest salary no matter how long he works. If your current plan is a generous one, don't feel too smug: It's perfectly legal for a company to reduce or even terminate a plan whenever it sees fit as long as it notifies participants and protects all the benefits that have accrued to date.

Although the lion's share of employers follow the basic formula, each plan has its own twists and turns. For example, different plans have their own vesting schedules, with full vesting after five years the most common. Whereas some companies once rewarded older workers for their loyalty and increased the benefit percentage after, say, 20 years, most now send a different message by reducing the benefit percentage after 25 or 30 years.

One constant: Age 55 is still the magic milestone for most plans. "That's when employees are entitled to certain early-retirement benefits," says managing director Sheldon Gamzon of Price Waterhouse. "It's not unusual to see the value of a pension increase between 50% and 100% for working one additional year." Why? Regardless of how generous its pension, a company is likely to apply a stiff penalty if you retire--that is, start receiving benefits--before age 65. However, once you turn 55, that unkind cut, usually 6% per year, gets greatly reduced, typically to just 3% per year. That's one reason, as Gamzon says, "companies that fire a 54-year-old are likely to see an age-discrimination lawsuit."

The second most popular variety of defined-benefit plan is the so-called career-average-pay plan. It works just the way it sounds. Your employer simply takes your aggregate career earnings and divides it by your length of service to determine your average annual salary. It does the same multiplications used in the earlier example, but now it's working with a lower salary because it uses your career average pay, not your final or highest pay.

How do career-average- and final-average-pay plans compare? FORTUNE asked consulting firms to run the numbers for two 35-year-old buddies: Chester signs on to a company with a career- average-pay plan; Freddie joins an outfit with a five-year-final-average plan. Each started out earning $30,000, received 5% annual raises, and retires after 30 years. The companies' benefit percentage in each case was a run-of-the-mill 1.25%, and they both ended up with final salaries of $123,484. Results: Chester, whose pension is calculated on career average pay of $66,438, winds up with a measly $24,914-a-year pension. Freddie, with the five-year-final-average-pay plan, ended up with a tidy annual pension of exactly $42,000. As that difference suggests, if you're ever in the position of evaluating a new job offer, the terms of the pension plan are worth asking about.

In recent years a new type of plan called the cash-balance plan, which defines the benefit as an account value, has gained popularity. A cash-balance plan with an annual contribution of, say, 5% is more akin to a company contribution to a 401(k) plan because it has an explicit account value that grows over time. Come your farewell lunch, you get your vested balance or a range of annuity options.

These new cash-balance vehicles are the only defined-benefit plans experiencing growth in the 1990s. Why? First, they are attractive to younger workers, who benefit from an early rise in their retirement accounts. Second, they don't saddle the company with the same kind of retirement liabilities as, say a final-average-salary plan. Says Mike Johnston, chief actuary at Hewitt Associates in Lincolnshire, Ill.: "Most of the telephone companies now offer these plans, and have combined these less generous offerings with increases in defined-contribution plans." Perhaps most important, like the 401(k), the cash-balance plan is always visible. Says Curt Morgan, a principal at the Kwasha Lipton Group: "To the employee, the value of his balance is always known."

How does the cash balance stack up? Assume a friend of Freddie and Chester--Barney--joined a third company with a cash-balance plan the same year at the same salary, got identical raises, and retired the same year. The company contributed 5% of Barney's salary each year to the cash-balance plan, which earned a typical 6% return annually. Come retirement at age 65, Barney gets a cash balance of $219,536, which he opts to take as an annuity: It will provide him an income of just $25,956, slightly more than the career-average pension plan but still far less than the final-average-pay one.

At retirement you, too, may face the same decision Barney does. More and more companies, an estimated 40% of them, are giving retirees the option of taking their pensions in a lump sum roughly equivalent to the present value of their projected lifetime payouts. There are no pat answers, whether from actuaries or from financial advisers, as to whether it is wise to do so. Part of the question revolves around what kind of cost-of-living adjustment, or COLA, is imbedded in your pension. Says Bob Winfield, a financial adviser with Legacy Wealth Management in Memphis: "Some plans are fairly generous, and if they include a COLA, it's hard to project with any confidence that you can earn more with a lump sum than you would with an inflation-adjusted pension."

Corporations are eager to have you take a lump sum, even if, by simple arithmetic, it costs them more. Why? They get to write pension liabilities off their books, says Paul Holzman, co-director of the National Center for Retirement Benefits in Northbrook, Ill. He suggests resisting the temptation to grab "the biggest check most people will ever see in their lives." But individuals with lots of other money might want to take the lump sum just to increase their investment flexibility. For others the lump vs. no-lump decision is going to be a stab in the dark.

To know definitively whether a lump sum is better or worse than a lifetime of pension payments, you would really need to know how long you'll live. That's because the lump sum is figured on the value of annual payouts over a typical life expectancy once you hit age 65: That's 82 years for a male and 86 years for a female. What you do have working in your favor is knowledge of your own health and the longevity of parents and grandparents. Thus, if your parents are in their 80s or 90s, the law of probability says lean toward the lifetime payout. If they passed away in their 60s or 70s, tilt toward the lump sum.

If you opt for the lump sum, current interest rates will determine how much you get. What companies essentially are trying to do is give you enough money to buy an annuity that would replicate the income stream from a lifetime payout. The relationship is counterintuitive. When rates are low, the lump sum will be greater than when rates are high, since the cost of an annuity that will produce a fixed income of, say, $2,000 per month rises as rates fall. The amount of your lump sum is regulated by Uncle Sam and friends. As part of the General Agreement on Tariffs and Trade, or GATT, passed by Congress in late 1994, companies may now use either the rate on the 30-year Treasury bond or the old standard Pension Benefit Guaranty Corp. rate, which had been the yardstick for calculating lump-sum payouts. Because the rate on the 30-year long bond is often as much as 2% higher, this will mean lower lump-sum payouts. "We often see people who left a company and received a much smaller amount than they expected," Holzman says. "We often have to tell them, 'You didn't get shortchanged; you got GATTed.' "

Your pension plan also probably offers you something called a contingent annuitant option. That means that in return for a reduced payout, your spouse will continue to receive half the pension's income should you die first. The option has declined in popularity with the rise of two-income--and often two-pension--households. But like the lump vs. no-lump dilemma, decisions on whether to take it should factor in your age, health, and financial status as well as those of your spouse. A few plans reduce your pension income by a flat amount, regardless of your spouse's age. Here, obviously, robbing the cradle works in your favor. But most adjust the reduction to reflect your spouse's age. Assume Freddie's wife is three years his junior. That $42,000 pension he's taking home is likely to be cut to $35,300 if he wants his wife to continue to receive half of it in the event that he dies first.

Given all the nips and tucks in the defined-benefit payment, and the fact that it's often shrouded in mystery, many employees prefer the more accessible 401(k) plan. Employers favor 401(k) plans because they avoid the liability of paying pension benefits at some point 30 years in the future. But that's one of the main reasons employees shouldn't be so quick to dismiss their defined-benefit plans. Consider: To achieve a $40,000 annual annuity that will run for 30 years, you'd have to start out with a lump sum of $365,600. That's what a full pension is worth in our example, and unlike 401(k)s, it's not market-sensitive, and you don't have to contribute a penny. But with 401(k) performance flying high lately, such bennies are hardly noticed. Says Bruce J. Temkin, an actuary at Louis Kravitz & Associates in Encino, Cal.: "It will take a prolonged down market for stocks before employees appreciate a defined-benefit plan again."

Of course, younger workers, weaned on downsizing and job-hopping, know they can take a 401(k) with them without penalty, and that's an advantage over defined-benefit plans. To find out how much, FORTUNE turned to Hewitt Associates to run the numbers and compare defined-benefit plans for two 35-year-old employees: one, like Freddie in the example above, a career-long employee, and the other, Peter, a job-hopper. Each again earns $30,000 and, working for 30 years, receives 5% annual raises at companies with five-year vesting schedules. Peter puts in four separate five-year stints at different employers and retires after spending ten years at his fifth job. We remember that Freddie took home a retirement pension of $42,000, based on the traditional final five-year average-pay plan and a benefit percentage of 1.25%. Peter, the job-hopper, however, receives five separate pension checks totaling just $26,400 per year. Ouch!

By contrast, had Freddie and Peter worked for companies with 401(k) plans, even skimpy ones, contributing 6% of their annual salary and earning annual returns of 8%, they both would have likely ended up with an account, or accounts in the case of the job-hopper, with identical values of $344,400. If they were to convert this lump sum into an annuity based on the 1984 Unisex Mortality Table and 8% interest rate, each would get an annual income of $42,000. That is without the help of a company match, typically 50% or so. Sure, the 401(k) is the better way to go if you're on the move. But what a great deal if your company offers both a defined-benefit plan and a 401(k)!

If all this talk about the munificent machinations providing for your retirement sounds optimistic for you, your skepticism is healthy and warranted. There are plenty of cases, in fact, of employees' not getting their due. Congress recently held hearings on the subject. But if you are like most Americans, you have few other options, besides increasing your savings rate. No one seriously believes any major companies are likely to sweeten the traditional pensions they offer. Instead, they expect further cutbacks in defined-benefit plans and continued growth for 401(k) plans. Whichever plan you have, it's important to understand what it will mean to you later on.