Few investments are more important than what you make in your retirement plan. Because the average American will depend on your savings for 18 years after retirement, it is critical that you understand your rights and responsibilities under your retirement plan. People who participate in retirement plans have certain rights that are governed by federal law [United States Code, title 29, section 1001 and following]. They also have responsibilities. Similarly, the people who sponsor your retirement plan also have rights and responsibilities. Most are detailed in a federal law called the Employee Retirement Income Security Act (ERISA) of 1974. This article explains some of the important features of this law.
Laws & Employer Obligations
For example, the article describes the role of different federal agencies in regulating plans. It describes the obligations of your employer (or other plan agents) in providing you with information about the plan and specifies what information should be made available to you automatically, at regular intervals, and in many cases free of charge. It also highlights the importance of keeping you informed of any changes to the operating rules of your plan. This article tells you what the general requirements are in order to be eligible for and access the plan, including how long you will need to serve as an employee before becoming a participant. Important concepts such as accrual of benefits and acquiring the right to access your benefits are explained. The article also answers common questions about how changes in your employee status could affect your retirement benefits, such as termination of employment or return to employment after a passive period. And analyze the possible impact on your plan for mergers, acquisitions and plant closures.
Here are some other important features:
- A description of your plan’s fiduciary duties to invest your money wisely and the penalties for fiduciaries who misuse or manage your money.
- An explanation of the rules that require your employer to correctly contribute funds to your pension plan, as well as a description of the penalties for employers who do not meet the minimum contribution requirements.
- Instructions for filing a claim for a retirement benefit and how to appeal for any type of claim denial to be reviewed.
The information in this article answers the most common questions about retirement plans. However, remember that this article is a simplified summary of the rights and responsibilities of participants and NOT a legal interpretation of ERISA.
The ERISA Act and your Retirement Plan
This section explains the purpose of the Employee Retirement Income Security Act, what it covers and what is excluded from its coverage. Mention which plans are exempt from the law and which plans are administered by it.
What is the ERISA Act?
The Employee Retirement Income Security Act (ERISA) of 1974 is a federal law that sets minimum standards for private sector retirement plans. For example, if your employer offers a plan, ERISA specifies when you can start participating, how long you must work before you can have an irrevocable interest in your benefits, how long you can be absent from work before it can affect your benefits and whether your spouse is entitled to part of your benefits in the event of your death. Most of the provisions of the ERISA Act are effective for plans beginning on or after January 1, 1975. No employer is required by ERISA to establish a retirement plan. It only requires that those who establish plans meet certain minimum standards. In general, the law does not specify the amount of money that must be paid to a participant as a benefit.
ERISA Does the Following
Requires plans to provide participants with information about the plan, including important information about the features of the plan and the contribution of funds. The plan must provide certain information on a regular and automatic basis. Some of this information is freely available and some is not.
- It establishes minimum standards for participation, the acquisition of rights, the accumulation of benefits and the contribution of funds. The law defines the amount of time a person must work before they can be eligible to participate in the plan, accumulate benefits, and have an irrevocable right to those benefits. The law also establishes detailed rules regarding the contribution of funds, which oblige plan sponsors to provide sufficient funds for their plan.
- It requires the responsibility of the plan’s fiduciaries. In general, ERISA defines a trustee as any person or entity that exercises discretionary authority or control over the management of a plan’s assets, including any person or entity that provides investment advice to the plan. Trustees who fail to adhere to the principles of conduct could be liable for restitution of losses to the plan.
- It gives participants the right to sue for benefits and breaches of trustee duties.
- In the event a benefit plan is terminated, it guarantees payment of certain benefits through a federally authorized corporation known as the Pension Benefit Guaranty Corporation (PBGC).
- ERISA also sets standards for health plans and other benefits provided by the employer, although those plans are not discussed in this article.
What are Defined Benefit Plans and Defined Contribution Plans?
Broadly speaking, these are two types of retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan offers you a specific monthly benefit when you retire. Depending on the plan, this specific monthly benefit can be an exact dollar amount, such as $ 100 per month when you retire. Or, more commonly, you can calculate a benefit using a plan formula that takes into account factors such as salary and service, for example, 1 percent of your average salary for the last 5 years of employment for each year of service with your employer. A defined contribution plan, on the other hand, does not offer you a specific amount of benefits when you retire. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a fixed rate, such as 5 percent of your annual earnings. These contributions are generally invested on your behalf. Ultimately, you will receive the balance in your account, which is based on contributions plus or minus investment gains or losses. The value of your account will vary due to changes in the value of your investments. Examples of defined contribution plans include 401 (k) plans, 403 (b) plans, employee stock ownership plans, and profit sharing plans. General ERISA rules apply to each of these types of plans, but some special rules also apply. To determine what type of plan your employer offers, check with the plan administrator or read the summary plan description. A defined contribution pension plan is a plan that requires a fixed annual contribution to your individual account from your employer. Because the defined contribution pension plan requires these regular contributions, it is subject to certain funding and other rules.
What Are Simplified Employee Pension Plans (SEP)?
Your employer may sponsor a Simplified Employee Pension Plan (SEP). SEP plans are relatively simple means of saving for retirement. A SEP plan allows employers to make tax-advantaged contributions to traditional individual retirement accounts (IRAs) owned by employees. SEP plans are subject to minimum reporting and disclosure requirements. As an employee, with a SEP plan you must establish an IRA in order to accept contributions from your employer. As a general rule, your employer can contribute up to 25 percent of your salary or $40,000 (the lower amount) per year to a SEP plan. As of January 1, 1997, employers can no longer offer a type of SEP plan known as a SEP pay cut plan. However, if an employer had a SEP pay cut plan in effect as of December 31, 1996, it may still allow pay cut contributions to the plan. These amounts are subject to cost of living adjustments in future years. SEP plan participants may also need to earn at least $450 (during 2003) to make salary reduction contributions. Employees are generally allowed to contribute the amount less than $ 12,000 or 25% of their compensation (up to $200,000) in 2003. Employees age 50 and older can make an additional supplemental contribution of $2,000 in 2003. That amount increases in increments of $1,000 until reaching the limit of $5,000 in 2006. Starting in 1997, employers can offer another type of plan that allows salary reduction contributions, a SIMPLE IRA.
What Are Small Business Employee Savings Incentive Parallel Contribution Plans (SIMPLE IRA)?
The Small Business Savings Incentive Match Plan for Employees (SIMPLE IRA) provides companies with fewer than 100 employees an affordable way to offer retirement benefits by contributing through salary reductions from employees and then match those contributions (similar to a 401 [k] plan). Any employer with fewer than 100 employees who have earned $5,000 or more during the previous calendar year is eligible to offer a SIMPLE IRA. However, an employer that currently sponsors another retirement plan, generally speaking, cannot sponsor a SIMPLE IRA. Also, SIMPLE IRA plans can be sponsored by most organizations, including C corporations, S corporations, partnerships, and sole proprietorships. Related employers (businesses under common control, for example) are considered individual employers. Eligible employees can contribute up to $8,000 in 2003 (gradually increasing to $10,000 in 2005) through payroll deductions. Supplemental provisions allow employees age 50 and older to make an additional $1,000 contribution in 2003, the limit of which increases by $500 each year to reach $2,500 in 2006.
- The employer can choose the financial institution that will receive all contributions under the plan. In this case, employees will have the right to transfer contributions to a SIMPLE IRA plan at another financial institution, free of charge or penalties.
- Each employee can initially choose which financial institution will receive the contributions. In this case, the employee does not have the right to transfer the contributions to another financial institution without cost or penalties.
In the end there are many steps one can take to begin preparing for their retirement. If your searching for specifics into any of the above mentioned retirement suggestions or you would like to review more options please visit our retirement archives.