Few investments are more important than the one you have in
your retirement plan. Since the average American will rely on savings for 18
years after retirement, it is essential that under your retirement plan, you have
to understand your rights and responsibilities.
Federal Law governs the rights of participants in retirement
plans. They also have responsibilities. Similarly, the people who sponsor your
retirement plan also have rights and responsibilities.
A law called the
Employee Retirement Income Security Act of 1974 spells out most (ERISA).
What Is ERISA?
In Private Industry, the Employee Retirement Income Security
Act of 1974 (ERISA) is a Federal law that sets minimum standards for retirement
plans.
For example, if your
employer maintains a plan, ERISA specifies
- When
you must be allowed to become a participant
- How
long you have to work before you have a no forfeitable interest in your
benefit
- How
long you can be away from your job before it might affect your benefit,
and
- Whether
your spouse has a right to part of your benefit in event of your death.
Most of the provisions of ERISA are effective for plan years
beginning on or after January 1, 1975.
Generally speaking, there are two types of retirement plans:
defined benefit retirement plans and defined contribution retirement plans.
Defined Benefit Plan
At the time of retirement, a defined benefit retirement plan
promises you a specified monthly benefit. The plan may state this promised
benefit as an exact dollar amount, such as $100 per month at retirement.
Or,
more commonly, it may calculate a benefit by means of a plan formula that take into
account such factors as salary and service for example, 1 percent of your
average salary for the last 5 years of employment for every year of service
with your employer.
Defined Contribution Plan
Alternatively, a defined contribution plan does not promise
you a specific amount of benefits at retirement. In these plans, you or your
employer (or both) make a payment to your individual account under the plan,
sometimes at a set rate, for example 5 percent of your earnings annually.
Generally,
these contributions are invested on behalf of you. Depending on contributions
plus or minus investment gains or losses, you will at last receive the balance
in your account.
Due to changes in the value of your investments, the value
of your account will fluctuate.
Examples
of defined contribution plans include:
Instead of general rules of ERISA, some special rules also
apply for each of these types of employee retirement plan types. In order to
determine the type of plan your employer provides, check with your plan
administrator or read your summary plan description.
A money purchase pension plan is a plan that requires fixed
annual contributions from your employer to your individual account. Because a
money purchase pension plan requires these regular contributions, the plan is
subject to certain funding and other rules.
401k Retirement Plan
If you are employed full time at a job with benefits (A.K.A. "a real job") you probably are entered into an employee retirement plan. Often
this is a 401(k) plan, which gets its name from the section of the IRS tax code
that defines it.
In this type of employee retirement plan, a portion of salary
is put into an interest-earning account. That portion of salary is deducted
from the amount of salary that is calculated for income tax, producing a
savings in income tax immediately.
No tax is paid on the amount invested in the 401(k) account
or on its interest until the money is paid out. Payments from the account are
considered regular income and are taxed accordingly.
Often, the income of
retirees is lower than it was when they were employed and pay a lower rate of
tax on this money that was earned earlier. Similar plans for employees of state
and local governments are called 457 plans.
Simplified Employee Pension Plans (SEPs)
SEPs are relatively uncomplicated retirement savings
vehicles. Your employer may sponsor a Simplified Employee Pension Plan.
A SEP
allows employers to make contributions on a tax-favored basis to traditional
individual retirement accounts (IRAs) owned by the employees. SEPs are subject
to minimal reporting and disclosure requirements.
Simple IRA Plan
For employees of small employers, the SIMPLE IRA plan savings
incentive match plan gives businesses with 100 or fewer employees an affordable
way to offer retirement benefits through employee salary reductions and
matching contributions (similar to those found in a 401k plan).
Profit-sharing plans or stock bonus plans
A profit sharing or stock bonus plan is a defined contribution
plan under which the plan may provide, or the employer may determine, annually,
how much will be contributed to the plan (out of profits or otherwise).
The
plan contains a formula for allocating to each participant a portion of each
annual contribution. A profit-sharing plan or stock bonus plan may include a
401(k) plan.
Employee stock ownership plans (ESOPs)
Employee stock ownership plans (ESOPs) are a form of defined
contribution plan in which the investments are primarily in employer stock. Congress
authorized the creation of ESOPs as one method of encouraging employee
participation in corporate ownership.
You can get more information about the retirement by
visiting the website at the URL http://www.dol.gov/.
What is the role of the Labor Department in regulating retirement plans?
The Department of Labor enforces Title I of ERISA, which, in
part, establishes participants' rights and responsibilities and fiduciaries'
duties. However, certain plans are not covered by the protections of Title I.
They are:
- Plans
maintained solely to comply with State workers' compensation, unemployment
compensation, or disability insurance laws.
- Federal,
State, or local government plans, including plans of certain international
organizations.
- Plans
maintained outside the United States
primarily for nonresident aliens.
- Unfunded
excess benefit plans - plans maintained solely to provide benefits or
contributions in excess of those allowable for tax-qualified plans.
Related Articles:
|
