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Your Retirement Plan: What You Should Know

Introduction

Few investments are more important than the one you have in your retirement plan. Because the average American will rely on savings for 18 years after retirement, it is essential that you understand your rights and responsibilities under your retirement plan.

Participants in retirement plans have certain rights that are governed by Federal law [29 USC Sec. 1001, et seq]. They also have responsibilities. Similarly, the people who sponsor your retirement plan also have rights and responsibilities. Most are spelled out by a law called the Employee Retirement Income Security Act of 1974 (ERISA). This article explains some of the important features of this law.

For example, the article outlines the role of different Federal agencies in regulating plans. It describes the obligations of your employer (or other appropriate plan official) to provide you with information about the plan, and tells you what information must be made available automatically, at regular intervals, and, in many cases, at no cost to you. It also points out the importance of keeping informed of any changes in your plan's rules of operation.

This article tells you what is generally required to become eligible for your plan, including how long you may have to be an employee before becoming a participant. Important concepts such as accruing benefits and becoming vested in your benefits are explained. The article also answers common questions about how changes in your employee status might affect your retirement benefits, such as termination or returning to your job after an interruption of employment. And it discusses the potential impact on your plan of mergers, acquisitions and plant shut downs.

Other important features include:

 

  • A description of your plan fiduciary's duties to invest your money prudently and the sanctions against fiduciaries who misuse or mismanage your money.
  • An explanation of the rules that require your employer to adequately fund your pension plan, as well as a description of the penalties for employers who fail to comply with minimum funding requirements.
  • Instructions on how to file a claim for a retirement benefit and how to appeal for a review of any denial of your claim.

The information contained in the following pages answers the most common questions about retirement plans. Keep in mind, however, that this article is a simplified summary of participant rights and responsibilities, not a legal interpretation of ERISA.

ERISA 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. It tells which plans are exempt from the law and who administers ERISA. The following questions are addressed:

 

  • What is the Employee Retirement Income Security Act?
  • What retirement plans are covered by ERISA?
  • How does the law protect a plan's assets?
  • What are SEPs, SIMPLEs, profit-sharing plans, and stock bonus plans?
  • What are 401(k) and ESOPs plans?
  • What is the role of Federal agencies?

What Is ERISA?

The Employee Retirement Income Security Act of 1974 (ERISA) is a Federal law that sets minimum standards for retirement plans in private industry. 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 nonforfeitable 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.

ERISA does not require any employer to establish a retirement plan. It only requires that those who establish plans must meet certain minimum standards. The law generally does not specify how much money a participant must be paid as a benefit.

ERISA does the following:

 

  • Requires plans to provide participants with information about the plan, including important information about plan features and funding. The plan must furnish some information regularly and automatically. Some is available free of charge, some is not.
  • Sets minimum standards for participation, vesting, benefit accrual and funding. The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits, and to have a nonforfeitable right to those benefits. The law also establishes detailed funding rules that require plan sponsors to provide adequate funding for your plan.
  • Requires accountability of plan fiduciaries. ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management of assets, including anyone who provides investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan.
  • Gives participants the right to sue for benefits and breaches of fiduciary duty.
  • Guarantees payment of certain benefits if a defined benefit plan is terminated, through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation.

ERISA also creates standards for health plans and other employer-provided benefits, but those plans are not discussed in this article.

What are defined benefit and defined contribution plans?

Generally speaking, there are two types of retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan promises you 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 your average salary for the last 5 years of employment for every year of service with your employer.

A defined contribution plan, on the other hand, does not promise you a specific amount of benefits at retirement. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a set rate, such as 5 percent of your earnings annually. These contributions generally are invested on your behalf. You will ultimately receive the balance in your account, which is based on contributions plus or minus investment gains or losses. The value of your account will fluctuate 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. The general rules of ERISA apply to each of these types of plans, but some special rules also apply. To determine what 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.

What are Simplified Employee Pension Plans (SEPs)?

Your employer may sponsor a Simplified Employee Pension Plan, or SEP. SEPs are relatively uncomplicated retirement savings vehicles. 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.

Under a SEP, you, as the employee, must set up an IRA to accept your employer's contributions. As a general rule, your employer can contribute up to 25 percent of your pay, or $40,000 (whichever is smaller) into a SEP each year.

As of January 1, 1997, employers may no longer set up a type of SEP known as a Salary Reduction SEP. If an employer had a Salary Reduction SEP in effect on December 31, 1996, however, the employer may continue to allow salary reduction contributions to the plan. These amounts are subject to cost-of-living adjustments in future years.

SEP participants may also be required to earn at least $450 (for 2003) to make salary reduction contributions. Employees are generally permitted to contribute the lesser of $12,000 or 25 percent of compensation (up to $200,000) in 2003. Employees 50 and older may make an additional catch-up contribution of $2,000 in 2003. That amount increases in $1,000 increments until the limit of $5,000 is reached in 2006.

Beginning in 1997, employers can set up another type of plan which allows salary reduction contributions, a SIMPLE IRA.

Note: Documents filed with the Labor Department can be obtained by contacting the U.S. Department of Labor, EBSA, Public Disclosure Facility, Room N-1513, 200 Constitution Avenue, NW, Washington, D.C. 20210, telephone: 202.693.8673.

What Are Savings Incentive Match Plans for Employees of Small Employers (SIMPLE IRAs)?

The SIMPLE IRA plan - savings incentive match plan for employees of small employers - 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 401(k) plan).

Any employer with 100 or fewer employees who earned $5,000 or more during the preceding calendar year is eligible to establish a SIMPLE IRA plan. However, an employer that currently sponsors another retirement plan generally cannot sponsor a SIMPLE IRA plan.

In addition, SIMPLE IRA plans can be sponsored by most types of organizations, including C-corporations, S-corporations, partnerships and sole proprietorships. Related employers (businesses under common control, for instance) are treated as a single employer.

Eligible employees can contribute up to $8,000 in 2003 (gradually increasing to $10,000 in 2005) through payroll deductions. Catch-up provisions allow employees 50 and older to make an additional $1,000 contribution in 2003, with the limit increasing $500 each year until reaching $2,500 in 2006.

When employers start these plans, they have two options for the IRAs where the contributions are deposited:

The employer may 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 at another financial institution without cost or penalty.

Each employee may make the initial choice of financial institution to receive contributions. In this case, an employee does not have the right to transfer to another financial institution without cost or penalty.

What are 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.

What are 401(k) plans?

Your employer may establish a defined contribution plan that is a cash or deferred arrangement, usually called a 401(k) plan. You can elect to defer receiving a portion of your salary which is instead contributed on your behalf, before taxes, to the 401(k) plan. Sometimes the employer may match your contributions. There are special rules governing the operation of a 401(k) plan. For example, there is a dollar limit on the amount you may elect to defer each year. The dollar limit is $12,000 in 2003 with annual increases in $1,000 increments until the limit reaches $15,000 in 2006. Other limits may apply to the amount that maybe contributed on your behalf. For example, if you are highly compensated, you may be limited depending on the extent to which rank-and-file employees participate in the plan. Your employer must advise you of any limits that may apply to you.

As with other types of retirement plans, a401(k) can permit catch-up provisions for employees age 50 and over. The catch-up amount in 2003 is $2,000 and increases in $1,000 increments until the limit reaches $5,000 in 2006.

Although a 401(k) plan is a retirement plan, you may be permitted access to funds in the plan before retirement. For example, if you are an active employee, your plan may allow you to borrow from the plan. Also, your plan may permit you to make a withdrawal on account of hardship, generally from the funds you contributed. The sponsor may want to encourage participation in the plan, but it cannot make your elective deferrals a condition for the receipt of other benefits, except for matching contributions.

What are 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.

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:

 

  • Federal, State, or local government plans, including plans of certain international organizations.
  • Certain church or church association plans.
  • Plans maintained solely to comply with State workers' compensation, unemployment compensation, or disability insurance laws.
  • 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.

The Labor Department's Employee Benefits Security Administration is the agency charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers' benefit rights and responsibilities.

 

Sources of Plan Information

Type of Document

Who You Can Get It From

When You Can Get It

Your Cost

Summary Plan Description (SPD): This summary of your retirement plan tells you what the plan provides and how it operates.

Plan Administrator

Upon written request

Reasonable Charge

Automatically within 90 days after you become covered under the plan

Free

Automatically every 5 years if your plan is amended

Free

Automatically every 10 years if your plan has not been amended

Free

Department of Labor

Upon Request

Copying Charge

Summary of Material Modifications (SMM): This summarizes material changes to your plan.

Plan Administrator

Automatically within 210 days after the end of the plan year for which the plan has been amended or modified (distribution of a revised SPD satisfies this requirement)

Free

Department of Labor

Upon Request

Copying Charge

Summary Annual Report: This summarizes the annual financial reports that most retirement plans file with the Department of Labor.

Plan Administrator

Automatically within 9 months after the end of the plan year, or 2 months after the due date for filing the annual report

Free

Annual Report (Form 5500 Series): Annual financial reports that most retirement plans file with the Department of Labor.

Plan Administrator

Latest annual report upon written request

Reasonable Charge

Department of Labor

Upon Request

Copying Charge

Individual Benefit Statement: A statement describing your total accrued and vested benefits is required to be provided by ;most retirement plans.

Plan Administrator

Upon written request once every 12 months

Free

Documents and Instructions under which the plan is established or operated: This includes, for example, the plan document, collective bargaining agreement, trust agreement, SPD, SMM, and latest annual report.

Plan Administrator

Upon written request

Reasonable Charge

Available for Inspection upon request

Free

Notice to Participants in Underfunded Plans.  Generally, single-employer pension plans that are less than 90% funded must give you notice reporting the finding level of the plan describing the and limits on PBGC's guarantees.

Plan Administrator

Within 2 months after the due date for filing the annual report

Free

What other Federal agencies regulate retirement plans?

The Treasury Department's Internal Revenue Service is responsible for ensuring compliance with the Internal Revenue Code, which establishes the rules for operating a "tax-qualified" retirement plan, including funding and vesting requirements. A plan that is "tax-qualified" can offer special tax benefits both to the employer sponsoring the plan and to the participants who receive retirement benefits. The IRS maintains a toll-free taxpayer assistance line for employee plans at 877.829.5500.

The Pension Benefit Guaranty Corporation, PBGC, a nonprofit, federally created corporation, guarantees payment of certain pension benefits under defined benefit plans that are terminated with insufficient money to pay benefits. The PBGC may be contacted at 1200 K Street, N.W., Washington, D.C. 20005, telephone: 202.326.4000.

Your Right To Plan Information

This section outlines the disclosure requirements of retirement plans. It describes the documents that a plan administrator must make available to you, the information these documents should contain, and alternative sources for the information. The following questions are addressed:

 

  • What information does the plan have to provide?
  • What is a summary plan description and how often should you get it?
  • Where can you get annual financial reports and other plan documents?
  • What penalties can be assessed if a plan administrator does not provide certain documents?

What information is your plan required to disclose?

ERISA requires plan administrators ("the people who run plans") to give you in writing the most important facts you need to know about your retirement plan. Some of these facts must be provided to you regularly and automatically by the plan administrator. Others are available upon request, free-of-charge, or for copying fees. Your request should be made in writing.

One of the most important documents you are entitled to receive is a summary of the plan called the summary plan description, or SPD. Your plan administrator is legally obligated to provide to you, free of charge, the SPD automatically when you become a participant of an ERISA-covered retirement plan or a beneficiary receiving benefits under such a plan. The summary plan description is an important document that tells you what the plan provides and how it operates. It tells you when you begin to participate in the plan, how your service and benefits are calculated, when your benefit becomes vested, when you will receive payment and in what form, and how to file a claim for benefits. You should read your summary plan description to learn about the particular provisions that apply to you. If a plan is changed you must be informed, either through a revised summary plan description, or in a separate document, called a summary of material modifications, which also must be given to you free of charge.

In addition to the summary plan description, the plan administrator must automatically give you each year a copy of the plan's summary annual report. This is a summary of the annual financial report that most retirement plans must file with the Department of Labor. These reports are filed on government forms called Form 5500. The summary annual report is available to you at no cost. To learn more about your plan's assets, you may ask the plan administrator for a copy of the annual report in its entirety.

If you are unable to get the summary plan description, the summary annual report, or the annual report from the plan administrator, you may be able to obtain a copy by writing to the Department of Labor, EBSA, Public Disclosure Room, Room N-1513, 200 Constitution Avenue, N.W., Washington, D.C. 20210, for a nominal copying charge. To help locate your plan documents, please provide enough information to assist EBSA in identifying the document, such as the name of the plan and city and state in which it is located, as relevant to the document.

If you have information that plan assets are being mismanaged or misused, call EBSA's toll free number at 1.866.444.EBSA and ask to speak with a regional office representative near you, or view a list of regional offices at www.dol.gov/ebsa.

On the following page is a list and description of the documents that must be made available to you. If a plan administrator refuses to comply with your request for documents, and the reasons are within his or her control, a court may impose a penalty of up to $110 per day. The Department of Labor does not have the authority to impose this penalty.

What documents are available from other Federal agencies?

Documents for some plans are available for public inspection at the Internal Revenue Service. These documents include the applications filed by retirement plans to determine if they meet Federal tax-qualification requirements, applications filed by certain organizations to determine if they qualify as tax-exempt, and the Internal Revenue Service responses to these applications. Get in touch with the Internal Revenue Service Public Access Reading Room, P.O. Box 795, Ben Franklin Station, Washington, D.C. 20044, telephone: 202.622.5164, for information on available documents.

If you terminate employment and you have a vested retirement benefit that you are not eligible to receive until later, that information will be reported by your plan to the Internal Revenue Service, which, in turn, will inform the Social Security Administration (SSA). This information must also be provided to you by the plan. The Social Security Administration will tell you, upon request, whether you were reported as having a deferred vested benefit under any plan. For information about making these requests, call 1.800.772.1213 (toll-free). SSA will automatically give you this information when you apply for social security benefits. Nevertheless, it is in your interest to keep the plan administrator informed about any change of address or name change after you leave employment to assure that you will receive the retirement benefit due to you.

Benefit Accrual And Vesting

This section describes ERISA's rules for eligibility, benefit accrual and vesting. It addresses the following questions:

 

  • What age and service requirements may a plan impose on eligibility?
  • What are accrued benefits?
  • What is vesting?
  • How long may it take to become vested?

Will you receive any benefits from your retirement plan if you leave employment before becoming vested?

Earning Service Credit

ERISA establishes rules for how employers must measure employees' employment service to determine how the eligibility, benefit accrual and vesting rules apply. ERISA generally defines a year of service as 1,000 hours of service during a 12-month period. Different rules apply to counting service for purposes of eligibility, benefit accrual and vesting.

A plan basically has a choice among three methods for determining whether you must be credited with a year of service for participation, vesting and, in some circumstances, benefit accrual: the general method of counting service, a simplified equivalency method, or the elapsed time method. Refer to your summary plan description to see which method is used by your plan.

Who must be allowed to participate in your employer's retirement plan?

Generally speaking, if your employer provides a plan that covers your position, you must be permitted to become a participant if you have reached age 21 and have completed 1 year of service. Even if you work part time or seasonally, you cannot be excluded from the plan on the grounds of age or service if you meet this service standard. You must be permitted to begin to participate in the plan no later than the start of the next plan year or 6 months after meeting the requirements of membership, whichever is earlier. You should be aware, however, that your employer may provide one or more plans covering different groups of employees or may exclude certain categories of employees from coverage under any plan. For example, your employer may sponsor one plan for salaried employees and another for union employees, or you may not be within the group that the employer defines as covered by a plan.

ERISA imposes certain other participation rules. They depend on the type of employer for whom you work, the type of plan your employer provides, and your age. For example:

 

  • If you were an older worker when you were hired, you cannot be excluded from participating in the plan on the grounds of age just because you are close to retirement.
  • If upon your entry into the plan, your benefit will be immediately fully "vested," or nonforfeitable, the plan can require that you complete 2 years of service before you become eligible to participate in the plan. 401(k) plans, however, cannot require you to complete more than 1 year of service before you become eligible to participate.
  • If you work for a tax-exempt educational institution and your plan benefit becomes vested after you earn 1 year of service, the plan can require that you be at least age 26 (instead of age 21) before you can participate in the plan.
  • If your employer maintains a SEP, you must be permitted to participate if you have performed services for
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