How the Retirement Plans Function?
Retirement plans must meet certain reporting and disclosure
requirements in addition to certain investment and fiduciary requirements to
receive tax advantages.
Reporting and Disclosure Requirements
Retirement plans are highly regulated by various government
agencies. Reporting requirements exist with the Internal Revenue Service (IRS),
Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC).
The DOL is mainly concerned with the safety of plan
participants. It needs that participants have access to information regarding
the plan; they must take delivery of a Summary Plan Description, a Summary
Annual Report detailing the plan's financial condition and annual benefit
statement, in addition to other material.
To assist in meeting its obligations, the PBGC insures
participants of most defined benefit pension plans and charges annual premiums
to ongoing defined benefit plans.
Investment and Fiduciary Requirements
To protect plan participants, ERISA imposes requirements for
plan investments. Investments must be diversified and follow the prudent man
rule. Plan assets must be protected by a trust and be separate from the assets
of the employer.
Between the employer and the trust, there must be no
self-dealing of any kind; these actions are called "prohibited
transactions" and are exposed to significant penalties.
If possible, by means of either delegating this function to
an investment committee or using investment managers or advisers, employers
should remove themselves from selecting plan investments.
What Is ERISA?
Federal Law governs certain rights in retirement plans for participants.
They also have responsibilities. Correspondingly, the people who sponsor your
retirement plan also have rights and responsibilities. A law called the
Employee Retirement Income Security Act (ERISA) of 1974 spells out most.
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