Pensions
For many elderly workers, pensions will help pay for many of the costs associated with their retirement. You should fully understand your pension program both before and after you retire. While still working, be sure to ask the administrator of your company's pension plan any questions you may have about the plan and your savings in it.
TIP: Many complicated rules govern pension plans. The Department of Labor's Employee Benefits Security Administration (EBSA) oversees pension plans. Contact your local EBSA office if you have any questions.
What is a pension plan and who can participate?
Pension plans allow workers to defer a portion of their salary into a financial account. The worker then receives these benefits at retirement. Companies do not have to offer pension plans to their employees. If they do offer a pension plan, it does not have to offer the plan to all employees.
If your employer offers a pension plan, you will have to meet certain eligibility requirements. These generally consist of an age requirement and a minimum length of employment.
EXAMPLE: Most plans require that participants be at least 21 years old and have worked for the company for at least 1 year. You generally also have to work a certain number of years to become "vested" in the plan. You do not have a legal right to collect money in your pension until you are vested.
What are the different types of pension plans?
Pension plans can be divided into two general categories: defined contribution plans and defined benefit plans.
- Defined contribution plans. In these plans, a separate account is set up for each participant. Generally, both the employer and employee pay in a specific amount. Employers will normally "match" contributions up to a certain percentage of the employee's pay. Common defined contribution plans include 401(k) plans, profit-sharing plans and employee stock ownership plans. The contributions by both the employer and the employee, along with any profits made by the company, determine your benefits at retirement.
- Defined benefit plans. These are plans that pay a specific amount to the participant at retirement. The plan sets the amount of each participant's benefit, as opposed to each participant's contribution in a defined contribution plan.
How can I be sure that my pension fund is safe?
Both defined contribution plans and defined benefit plans are subject to fund mismanagement. Poor management can reduce the amount of money in the plan and affect your payout at retirement. Federal pension insurance applies to some, but not all, pension plans.
TIP: It is up to you to review your pension plan statements and ask your plan administrator questions about any discrepancies you may find.
What is ERISA and how does it affect me?
The Employee Retirement Income Security Act (ERISA) protects worker's retirement funds. It sets minimum standards and guarantees employees' rights under pension plans. It also governs plans' fiduciary responsibilities to manage the fund. The fiduciary, usually your plan administrator, must manage the fund with the participants' best interest in mind. The fiduciary must act prudently in managing the fund and must diversify investments in the fund to minimize losses.
What is a Summary Plan Description?
Private employers that offer pension plans must provide a Summary Plan Description (SPD) to each participant. The SPD must state who can participate in the plan, how the plan determines benefits, how old you have to be to receive benefits under the plan, any vesting schedule, who the plan administrator is and all procedures relating to claims against the pension plan.
What is a Summary Annual Report?
Every pension plan is required to provide each participant with a Summary Annual Report (SAR). This SAR will summarize the financial reporting that each plan is required to file each year with the federal government. It will show you the amount of gain or loss in the plan's investments and plan expenses. You can also request (in writing) the actual forms that the plan filed with the Internal Revenue Service.
My employer told me I would not be receiving as much in benefits as I thought because I had a "break in service." What is this?
A break in service can affect the amount of pension "credits" you earn. Under ERISA, a plan may provide that an employee incurs a break in service if he or she fails to complete more than 500 hours of service in a 1-year period. On returning to work more than 500 hours in a 1-year period, you lose those benefits that were not vested if the number of years of your break is greater than the number of years credited before your break.
CAUTION: Breaks in service are governed by very complex rules. In some cases, when you return to employment, you have the immediate right to rejoin the pension plan, and in other situations, you must wait to enroll. Read your SPD to find out about your plan's specific break in service rules. Contact your plan administrator and your local Employee Benefits Security Administration office if you have any questions.
When can I start receiving my benefits?
ERISA rules govern when you can start to receive benefits under a pension plan. Plans normally define a retirement age at which time you can start to receive benefits. Some plans will allow early payment of benefits if you terminate your employment, become disabled or die.
TIP: Rules vary according to the type of plan-defined contribution plan or defined benefit plan-so be sure to consult your SPD or contact your plan administrator.
How do I claim my benefits?
Each plan will set the rules on how benefits are received. ERISA does, however, require that each plan have a written procedure in place for claims and any appeals of claim benefits. Check with your SPD or plan administrator to find out what steps you need to take.
What if I die before I receive my pension benefits? Can my spouse receive them?
ERISA allows some surviving spouses to receive benefits if the participant was vested in the plan before his or her death. The amount of benefits will depend on what type of plan the employee participated in and whether benefits had already begun to be paid out.
TIP: Check with your SPD or plan administrator to find out whether survivor benefits exist.
My pension plan has a "joint and survivor annuity." What does this mean?
This means that your spouse will receive a portion of your benefit payments even if you die.
EXAMPLE: In a defined benefit plan, you will receive monthly installments for the rest of your life. On your death, your spouse will receive continued benefits. The payment does not have to be for the full amount paid to you during your lifetime, but it must be at least 50 percent of the amount paid to you. You and your spouse can waive the right to these payments and choose to receive payment in another form.
I was recently fired. What happens to my pension plan account?
Most defined contribution plans allow for a lump-sum payment in the amount of your accrued benefits. This is not always the best solution. You will have to pay substantial taxes on this lump-sum amount. It is best to "roll over" these funds into another retirement savings vehicle.
TIP: You generally have 60 days to roll over your funds into another account, such as an Individual Retirement Account (IRA).
Defined benefit plans, on the other hand, will most likely still pay benefits when you reach the retirement age specified in the plan. If you are fired, be sure you have a copy of the SPD. This will explain your rights regarding accrued benefit money for this situation.
My employer terminated its pension plan. Can it do this?
Yes. ERISA governs all pension plan terminations and provides some protection to participants. Thus, in most cases, you will become 100 percent vested in all accrued benefits at the time your employer terminates the plan.