Tuesday, December 9, 2008

Pensions and Retirement

For many of us retirement finances are very much related to our current or expected pension, and in these economically troubled times you'd be well advised to make sure you understand not only what you *probably* have coming to you in terms of a pension but what your rights are in the case that things don't turn out as planned.

Here, from the US Department of Labor, are some guidelines and definitions about Pensions and retirement:

Retirement Plans, Benefits & Savings

Types of Retirement Plans

The Employee Retirement Income Security Act (ERISA) covers two types of pension plans: defined benefit plans and defined contribution plans.

A defined benefit plan promises a specified monthly benefit at retirement. 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 through a plan formula that considers such factors as salary and service — for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee's behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.

A Simplified Employee Pension Plan (SEP) is a relatively uncomplicated retirement savings vehicles. A SEP allows employees to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements. Under a SEP, an employee must set up an IRA to accept the employer's contributions. Employers may no longer set up Salary Reduction SEPs. However, employers are permitted to establish SIMPLE IRA plans with salary reduction contributions. If an employer had a salary reduction SEP, the employer may continue to allow salary reduction contributions to the plan.

A Profit Sharing Plan 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 include a 401(k) plan.

A 401(k) Plan is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There are special rules governing the operation of a 401(k) plan. For example, there is a dollar limit on the amount an employee may elect to defer each year. An employer must advise employees of any limits that may apply. Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments.

An Employee Stock Ownership Plan (ESOP) is a form of defined contribution plan in which the investments are primarily in employer stock.

A Money Purchase Pension Plan is a plan that requires fixed annual contributions from the employer to the employee's individual account. Because a money purchase pension plan requires these regular contributions, the plan is subject to certain funding and other rules.

A Cash Balance Plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5 percent of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

Department of Labor Web Pages on the "Retirement Pension" Topic

Consumer Information on Pension Plans
Publications and other materials providing information about your rights as pension plan participants under federal pension law.

Compliance Assistance
Provides publications and other materials designed to assist employers and employee benefit plan practitioners in understanding and complying with the requirements of ERISA as it applies to the administration of employee pension and health benefit plans.

A Look at 401(k) Fees for Employers
Provides information to help you ask the right questions to better understand and evaluate the fees and expenses related to your plan.

Understanding Retirement Plan Fees And Expenses
Provides information about plan fees, including ten questions to help you gather information about your 401(k) plan.

401(k) Plan Fees Disclosure Tool (PDF)
Provides employers with a way to get uniform information on fees from prospective plan service providers to make apples to apples comparisons of prospective plan service providers.

Cash Balance Plans: Questions and Answers
Provides answers to commonly asked questions about cash balance plans.

Pension and Health Care Coverage: Questions and Answers for Dislocated Workers
Provides answers to commonly asked questions from dislocated workers about their pension and health plan benefits.

QDROs: The Division of Pensions through Qualified Domestic Relations Orders
QDROs are domestic relations orders that recognize the existence of an alternate payee's right to receive benefits payable to a participant under a pension plan. This fact sheet provides questions and answers on QDROs.

ERISA Filing Acceptance System (EFAST)
The EFAST system streamlines filing and processing of the annual return/report forms through the use of computer scannable forms and electronic filing technologies. This Web site provides assistance on using this system.

Simplified Employee Pensions: What Small Businesses Need to Know
Describes an easy, low-cost retirement plan option for employers.

Easy Retirement Solutions for Small Businesses
Provides information about retirement plan options for small businesses.

Savings Incentive Match Plan for Employees of Small Businesses
Provides information about the basic features and requirements of SIMPLE plans that involve individual retirement accounts or annuities (SIMPLE IRAs).

What You Should Know About Your Pension Rights
Provides information to help answer many of the most common questions about pension plans.

Your Employer's Bankruptcy: How Will it Affect Your Employee Benefit?
Provides information on bankruptcy’s effect on pension plans and group health plans.

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