An important part of your financial future is your employer’s retirement savings plan. It’s important to understand how your plan works and what benefits you’ll receive. Just like you would keep an eye on your savings at a bank or other financial institution, it’s in your best interest to keep an eye on your retirement benefits.
The people who are responsible for managing and overseeing your retirement plan must follow certain rules to operate the plan, handle the plan’s funds, and manage the funds. You should also understand and oversee your retirement plan and your benefits. Each chapter contains ” Action Items ” to help you understand and oversee.
This booklet will help you understand your plan; what information you should review regularly; and where to go for help with questions. It includes information on:
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- Different types of retirement plans;
- What information can you get about your plan;
- When and how you will receive your retirement benefits;
- What to do if you have questions or discover an error;
- the responsibilities of those who manage the scheme and its investors;
- You are responsible for understanding and monitoring your plan; and
- Specific circumstances such as divorce or a change in employer ownership may affect your retirement benefits.
Any terms you see in blue in the text are explained in the glossary.
Retirement Plans Covered in This Booklet
This booklet covers private retirement plans that are governed by federal laws and guidelines in the Employee Retirement Income Security Act of 1974 ( ERISA ) and the Internal Revenue Code. ERISA is a federal statute that sets standards for most employer- and union-sponsored retirement plans in the private sector and imposes responsibilities on plan operators. Participants in these plans have certain rights and responsibilities.
The rules discussed in this booklet do not apply to all retirement plans. For example, this information does not apply to:
- State and local government programs, including those involving public school teachers and school administrators;
- Most church programs; and
- Federal Government Employee Program.
If you are in a collectively bargained plan, the rules that apply under ERISA may be different in some cases.
The information contained in the following pages answers the most frequently asked questions about retirement plans. Please note, however, that this booklet is only a brief summary of participant rights and responsibilities and is not a legal interpretation of ERISA .
Chapter 1: Types of Retirement Plans
To understand your retirement benefits, the first step is to find out what kind of retirement plans your employer has. There are two main types of plans—defined benefit plans and defined contribution plans—which are described below and summarized in Table 1. Keep in mind that your employer may have more than one type of plan and may have different participation requirements for each plan.
Defined benefit plans are employer-funded plans that promise to provide a certain monthly benefit after you retire. The plan may state the promised benefit as an exact dollar amount, such as $100 per month after retirement; more commonly, the plan may calculate your benefit using a formula that includes factors such as your salary, your age, and your years with the company. For example, your pension benefit may be equal to 1% of your average salary over the past five years of employment multiplied by your total years of service.
On the other hand, defined contribution plans do not promise you specific benefits in retirement. Instead, you and/or your employer contribute money into your individual account. In many cases, you are responsible for choosing how those contributions are invested and deciding how much to contribute from your paycheck through pre-tax deductions. Your employer may add to your account and, in some cases, match a percentage of your contributions. The value of your account depends on the amount you contribute and the performance of your investments. At retirement, you receive a balance in your account that reflects contributions, investment gains and losses, and any fees charged to your account. A 401(k) plan is one of the more popular defined contribution plans. There are four types of 401(k) plans: Traditional 401(k) , Safe Harbor 401(k) , SIMPLE 401(k) , and Automatic Enrollment 401(k) . Other examples of defined contribution plans are SIMPLE IRAs , SEPs , and Employee Stock Ownership Plans ( ESOPs ). Profit sharing plans are other examples of defined contribution plans. (See the glossary at the end for an explanation of the various types of plans.)
Remark
- Employers can choose whether to offer a retirement plan to their employees; federal law does not require employers to offer or continue to offer a plan.
- The Pension Benefit Guaranty Corporation ( PBGC ) guarantees payment of certain retirement benefits for participants in most private defined benefit plans if there are insufficient funds to pay all promised benefits when the plan is terminated . The government does not guarantee the payment of benefits under defined contribution plans. For more information, visit the PBGC ‘s website at PBGC.gov .
- Some hybrid plans—such as cash balance plans —have features of both types of plans. For information about these plans, see the Glossary.
Action Items
Ask your plan administrator, human resources department, or employer what type of plan you have at work. You can ask for a copy of the Plan Summary Statement (the retirement plan brochure you should have received when you joined the plan) and review information about the plan.
| Defined Benefit Plans | Defined Contribution Plan | |
|---|---|---|
| Employer contributions and/or matching contributions | Employer-funded. Federal regulations set the amount that employers must contribute to the plan to ensure that the plan has enough funds to pay benefits as they become due. Failure to meet these requirements carries penalties. | Except for SIMPLE and safe harbor 401(k)s , money purchase plans, SIMPLE IRAs and SEPs , there are no required employer contributions. In certain automatic enrollment 401(k) plans, employers may have to contribute. Employers may choose to match a portion of employee contributions or make contributions without employee contributions. In some plans, employer contributions may be in the form of employer stock. |
| Employee contributions | Generally, employees do not contribute to such plans. | Many plans require employees to make contributions in order to establish the account. |
| Managed Investments | The investments are managed by plan officials. The employer is responsible for ensuring that the amount it invests in the plan plus investment earnings is sufficient to pay the promised benefits. | Employees are usually responsible for managing the investments of their accounts, choosing from among the investment options offered by the plan. In some plans, the plan officer is responsible for investing all of the plan’s assets. |
| Amount of benefits paid upon retirement | The promised benefits are based on a formula, usually using a combination of the employee’s age, years with the employer, and/or salary. | Benefits depend on employee and/or employer contributions, account investment performance, and fees charged to the account. |
| Retirement benefit payment type | Traditionally, these plans pay retirees a monthly annuity payment that lasts their lifetime. Plans may offer other payment options. | Retirees can roll over account balances into and withdraw from an individual retirement account ( IRA ), or take a lump sum withdrawal. Some plans also offer monthly payments through annuities. |
| Welfare guarantee | The federal government, through the Pension Benefit Guaranty Corporation ( PBGC ), guarantees a certain amount of benefits. | There are no federal benefit guarantees. |
| Leaving the job before reaching retirement age | If an employee leaves the plan after benefits vest but before the plan’s retirement age, the benefits generally remain in the plan until the employee files for payment at retirement. Some defined benefit plans also have early retirement options. | Employees can transfer account balances to an individual retirement account ( IRA ) or, in some cases, to another employer plan, where they can continue to grow based on investment earnings. Employees can also withdraw balances from the plan but will owe taxes and possibly penalties, reducing retirement income. Plans can cash out small accounts. |
Chapter 2: Obtaining Retirement Benefits
Once you understand what type of retirement plan your employer offers, you need to understand when you can participate in the plan and begin receiving benefits. Plan rules can vary as long as they comply with federal law; you need to check with your plan or review the plan’s handbook (called the Summary Plan Description ) to understand the rules and requirements of your plan. Your plan may require you to work for the company for a certain period of time before you can participate in the plan. In addition, there is usually a time frame to begin accruing benefits and becoming entitled to them (sometimes called “vesting”).
Who can participate in your employer’s retirement plan?
You need to find out if you are covered by your employer’s retirement plan. Federal law allows employers to cover certain groups of employees and exclude others. For example, your employer may sponsor one plan for salaried employees and another for union employees. Part-time employees may qualify if they work 1,000 hours per year, or about 20 hours per week. So if you work part-time, find out if you are covered.
When can you start participating?
Once you know you are covered, you need to know when you can begin participating in the plan. This information can be found in the plan’s Summary Plan Description. Federal law sets minimum requirements, but some plans may have more lenient requirements. Generally, plans may require that employees be at least 21 years old and have one year of service before they can participate in the plan. However, some plans may allow employees to begin participating before they turn 21 or before they have one year of service. For administrative reasons, your participation may be delayed until you meet the age and length of service requirements, for up to six months, or until the beginning of the next plan year , whichever comes first. A plan year is the calendar year or other 12-month period that a retirement plan uses to administer the plan. It is important that you understand the rules of your employer’s plan.
In some cases, an employer can increase the length of service requirement. For example, if your plan allows you to vest immediately upon joining the plan (discussed in more detail later in this chapter), it may also require that you have been with the company for two years before you can join the plan.
Federal law also provides additional participation rules for certain situations. For example, if you were older when you were hired, you cannot be excluded from the plan simply because you are near retirement age.
Some 401(k) and SIMPLE IRA plans automatically enroll employees. This means you will automatically be a participant in the plan unless you opt out. The plan will deduct a predetermined contribution amount from your paycheck and invest it in predetermined investments. If your employer has an automatic enrollment plan , you should receive a notice that explains the automatic contribution process, when your participation begins, your opportunity to opt out of the plan or change your contribution level, and where your automatic contributions are invested. The notice will also explain your rights to change investments if you are participating in a 401(k) plan, or your rights to change the institution (financial institution) where your contributions are invested if you are participating in a SIMPLE IRA plan.
When do benefits begin to accrue?
Once you start participating in a retirement plan, you need to understand how your benefits accrue. Accumulated benefits refer to the amount of retirement benefits you have accumulated or allocated to you under the plan at any given point in time.
Defined benefit plans typically count your years of service to determine whether you have earned a benefit and to calculate how much you will receive when you retire. Part-time employees who work 1,000 hours or more per year must contribute a portion of their benefits prorated to what they would have earned if they were full-time employees. In a defined contribution plan , your accrued benefit is the amount of contributions and earnings accumulated in your 401(k) or other retirement plan account, minus any fees your plan charges to your account.
For some types of retirement plans, there may be special rules about when you can start accumulating benefits. For example, in a simplified employee pension ( SEP ) plan , all participants who earn at least $650 per year from their employer are entitled to contributions.
Can plans reduce promised benefits?
Defined benefit plans can change the rate at which you receive future benefits, but they cannot reduce the amount of benefits you have already accrued. For example, a plan that accrues benefits at a rate of $5 per month for service years ending in 2021 could change to accrue benefits at a rate of $4 per month for service years beginning in 2022. If a plan significantly reduces its benefit accrual rate, it generally must give you written notice at least 45 days before the change takes effect.
In most cases, if a company terminates a defined benefit plan because it does not have enough money to pay all promised benefits, the Pension Benefit Guaranty Corporation ( PBGC ) will pay a portion of the retirement benefits to plan participants and beneficiaries, but it may be less than the promised benefits. (For more information, see the PBGC ‘s website at PBGC.gov .)
In a defined contribution plan, the employer can change the employer contribution amount in the future. The employer can also stop contributing for a few years or indefinitely, depending on the terms of the plan.
An employer can terminate a defined benefit plan or a defined contribution plan, but it cannot reduce the benefits you have already accrued.
How quickly can you gain access to the benefits you have accumulated?
Your own contributions and earnings become yours immediately. This means you gain ownership of these funds without the risk of forfeiture. However, be aware that there are restrictions on actually withdrawing these funds from the plan. See the discussion of distribution rules later in this publication.
However, any contributions your employer makes do not necessarily vest in you immediately. Federal law sets the maximum number of years a company can require an employee to have worked for you in order for all or part of these benefits to vest. (See table for vesting rules . )
In a defined benefit plan, an employer can require an employee to have worked for 5 years before 100% of the employer-funded benefits vest (called cliff vesting ). An employer can also choose a progressive vesting schedule, requiring an employee to work for 7 years before 100% vesting, with a minimum vesting of 20% after 3 years, 40% after 4 years, 60% after 5 years, and 80% after 6 years of service. See Table 3 for the approved vesting schedules for current defined benefit plans . Plans may provide for different schedules as long as they are more relaxed than this schedule. (Unlike most defined benefit plans, employees in cash balance plans vest after 3 years on employer contributions.)
In a defined contribution plan, such as a 401(k) , you always vest 100% of your contributions and any subsequent earnings. However, in most defined contribution plans, you may have to work for several years before your employer’s matching contributions become available. (There are exceptions, such as SIMPLE 401(k) s and safe harbor 401(k) s. In these cases, the required employer contributions vest in full immediately. In SIMPLE IRAs and SEPs , you also vest immediately.)
Currently, employers can choose between two different vesting schedules for employer matching 401(k) contributions, as shown in Table 2. Your employer may use a cliff vesting schedule, under which employees become 100% vested on their employer contributions after 3 years of service. Under a graduated vesting schedule, employees must vest at least 20% after 2 years, 40% after 3 years, 60% after 4 years, 80% after 5 years, and 100% after 6 years. If your automatic enrollment 401(k) plan requires employer contributions, those contributions will vest in you after 2 years. If your automatic enrollment 401(k) plan has optional matching contributions, it will be subject to one of the above vesting schedules.
Employers who make other contributions to defined contribution plans , such as 401(k) plans, can also choose between gradual and cliff vesting arrangements. For contributions made since 2007, they can choose between the arrangements listed in Table 2; for contributions made before 2007, they can choose between the arrangements listed in Table 3.
If you leave your job before you have reached the vesting age requirement, you may lose a portion of the benefits you have earned from your employer. However, for defined-vesting benefits, you are entitled to the defined-vesting portion of your benefits even if you leave your job before retirement. But even if you are entitled to certain benefits, the value of your defined-contribution plan account may still decline after you leave your job due to poor investment performance.
Notes
If you leave your company and then return, you may be able to count your prior employment toward the length of service required to determine the vesting of employer-provided benefits. You may count your prior employment toward your seniority unless you have been away from the company for 5 years or as long as you were with the company before your break, whichever is longer. Because the rules are very specific, you should read your plan documents carefully and discuss them with your plan administrator if you are planning a short-term break.
For Reserve and National Guard members called to active duty, the Uniformed Services Employment and Reemployment Rights Act ( USERRA ) requires that periods of military service be counted toward the employer’s covered service for purposes of determining eligibility, vesting, and accruing benefits. Rehired members are considered continuously employed regardless of the employer’s retirement plan. However, rehired individuals are only entitled to accrued benefits resulting from employee contributions if they actually contribute to the plan.
Attribution Rules
Generally, employers must calculate your years of service from your date of employment when determining your vesting period. With the following two exceptions, your employer may calculate your years of service from the first plan year after: (1) your 18th birthday (if you were under 18 when you started working for the company); or (2) the date you began contributing to your 401(k) plan (if you chose not to contribute when you first became eligible).
A plan may allow employees to receive employer-provided benefits earlier than indicated in the table below.
Minimum vesting required employer contributions under ERISA
(use the form in effect when you leave employment)
Table 2 below sets forth the current vesting arrangements for employer matching 401(k) plan contributions (beginning in 2002) and other employer contributions under defined contribution plans (beginning in 2007).
| Progressive vesting | |
|---|---|
| Working experience (years) | Non-forfeitable percentage |
| 2 | 20% |
| 3 | 40% |
| 4 | 60% |
| 5 | 80% |
| 6 | 100% |
| Cliff of Attribution | |
| Less than 3 years of service | Vesting 0% |
| 3 years or more of service | Vesting 100% |
Table 3 applies to employees who participate in defined benefit plans; it also applies to employees who received other employer contributions under a defined contribution plan before 2007*, employers who matched 401(k) contributions before 2002, and defined contribution plan employees who left employment after December 31, 1988.
*If the plan is top heavy , Table 2 applies.
| Progressive vesting | |
|---|---|
| Working experience (years) | Non-forfeitable percentage |
| 3 | 20% |
| 4 | 40% |
| 5 | 60% |
| 6 | 80% |
| 7 | 100% |
| Cliff of Attribution | |
| Less than 5 years of service | Vesting 0% |
| 5 years or more of service | Vesting 100% |
Table 4 applies to employees who left the company before 1989.
| Progressive vesting | |
|---|---|
| Working experience (years) | Non-forfeitable percentage |
| 5 | 25% |
| 6 | 30% |
| 7 | 35% |
| 8 | 40% |
| 9 | 45% |
| 10 | 50% |
| 11 | 60% |
| 12 | 70% |
| 13 | 80% |
| 14 | 90% |
| 15 | 100% |
| Cliff of Attribution | |
| Less than 10 years of service | Vesting 0% |
| 10 years or more of service | Vesting 100% |
45 Rule – If the employee’s age and length of service add up to 45 and the employee has 5 years or more of service, then 50% of the benefits shall vest with the employee, with a minimum of 10% vesting each year thereafter.
Action Items
- Find out if you are covered by your employer’s plan.
- Find out how soon after you start working for the company you can start participating and/or contributing to your retirement plan.
- Get the Program Summary Description.
- Check your plan document or Plan Summary Description to learn how to get your plan benefits.
- Understand your plan’s vesting schedule to find out when you’ll be fully vested. If you’re thinking of changing jobs, check your plan to see if longer service will allow you to vest more of your employer’s contributions.
Chapter 3: Program Information to be Reviewed
If you have questions about your retirement plan, a good place to start is by looking for answers in the information provided by the plan. You can get this information from your plan administrator , the person who manages the plan. Your employer can tell you how to contact your plan administrator.
Information provided by retirement plans
Every retirement plan must have formal, written plan documents that detail how it operates and what it requires. As mentioned earlier, there is also a booklet that describes the important rules of the plan, called the Summary Plan Description ( SPD ) , which should be easier to read and understand; it should also include a summary of any significant changes to the information required in the plan or SPD . You can read the SPD first and then look at the plan documents if you still have questions.
In addition, the plan must provide you with certain notices. Table 5 describes some important notices.
For example, defined-contribution plans, such as 401(k) plans, generally must notify employees in advance of a “lockup period.” A lockup period is when a participant’s right to direct investments, take out loans or receive distributions is suspended for at least three consecutive business days. Lockups often occur when a plan changes account managers or investment options.
Certain plan information, such as the Plan Summary Statement, must be provided to you without charge within the time periods shown below. You can ask for a Plan Summary Statement at other times, but your employer may charge you for a copy. If you want other information, such as copies of the written plan documents or the plan’s annual financial report (Form 5500), you must contact the plan and may be charged a copy fee. See Tables 5 and 6. Many employers provide benefit information on their websites.
| project | describe | Time limit |
|---|---|---|
| Summary Plan Description ( SPD ) | A summarized version of the plan documents and other important plan information, in easy-to-understand language. | Within 90 days of becoming a plan participant; and once every 10 years (or every 5 years if the plan is revised). |
| Automatic registration notification | A description of the automatic enrollment process, the percentage of salary that is deferred, the default investments used for automatic contributions, your rights to opt out of the plan, your rights to change your deferral percentage and investments, and how to find information about the plan’s other investments. | Generally, at least 30 days before you become eligible; and at least 30 days before the start of each plan year thereafter. |
| Personal benefit statement | A statement that provides information about your account balances and vested interests. Depending on the type of plan you have, the statement may also include the value of the investments in the account and information describing your authority to direct the investments. | Participant-directed defined contribution plans: at least quarterly; non-participant-directed defined contribution plans: at least annually; or defined benefit plans: at least every 3 years. |
| Annual Funding Notice | Basic information about the defined benefit pension plan and its financial condition, including the plan’s funded percentage, assets and liabilities, participant demographics, funding policy, emerging hazards, critical or distressed, and deteriorating conditions; and a description of benefits guaranteed by the PBGC . | Generally within 120 days after the end of the plan year. |
| Investment information for plans and participant-led plans | Plan and investment-related information, including information on fees and expenses, so that participants can make informed decisions to manage their individual accounts. Investment-related information must be provided in a format such as charts to facilitate comparison of the plan’s investment options. | Before the first time a participant can direct an investment; thereafter, at least annually; and actual fees and expenses paid: at least quarterly. |
| Summary of Major Changes | A summary of significant program changes or changes to information required in the program summary statement. | Within 7 months after the end of the plan year in which the change occurs. |
| Annual Report Summary | It is a summary of the financial information that a plan submits on its annual return/report, Form 5500. If your plan provides an annual funding notice, you are not required to provide this report. | Within 9 months after the end of the plan year or within 2 months after the annual report filing deadline. |
| Notification of a significant reduction in future accrued benefits | Notice of a significant reduction in future benefit accrual rates or the elimination or significant reduction of early retirement benefits or retirement-type allowances. Applies to defined benefit plans and certain defined contribution plans. | At least 45 days before the effective date of the planned modification. |
| Closure Notice | Notification of a temporary suspension, limitation, or restriction on directing or diversifying plan assets, obtaining loans, or obtaining distributions for a period of more than three consecutive business days. Applies to most 401(k) or other individual account plans. | Typically, at least 30 days before the lock-in date. |
| Notification to Participants of Insufficient Plan Funds | For defined benefit plans that are less than 80 percent funded, notice of the plan’s funding level and information regarding the PBGC guarantee. | Within 2 months after the annual report filing deadline. |
| Notification of critical or endangered status | A notice that a multiemployer pension benefit plan is in critical or endangered status due to funding or liquidity problems. The notice must include an explanation of why certain adjustable benefits may be reduced. | No later than 30 days after the plan actuary’s annual certification, if the actuary certifies that the plan is in critical or endangered status. |
The plan administrator may provide this information to you in writing or electronically. If provided electronically, the plan administrator may post the disclosure on the plan’s website or send it to you via email after notifying you that the disclosure will be provided to you electronically. If you receive a disclosure electronically, the law provides a number of protections for you, including the right to request a paper copy or to opt out of receiving the disclosure electronically. Your plan administrator is also required to take reasonable steps to protect the confidentiality of your personal information online.
| project | describe | cost |
|---|---|---|
| Various planning documents | Documents that provide the terms of the plan, including the collective bargaining agreement and the trust agreement. | Reasonable copying costs |
| Annual Report (Form 5500) – Most recent report | Most plans must report plan-related financial information to the government within 7 months after the end of the plan year . | Reasonable copying costs |
What program information should be reviewed regularly?
If you are in a defined benefit plan , you will receive a personal benefit statement every 3 years . Pay attention to the total amount of benefits you have received and whether they have been attributed to you. Also make sure it contains your date of birth, date of employment, and other information correctly. You will also receive an annual notice about the funding status of your plan.
Defined contribution plans, including 401(k) plans, must also send participants individual benefit statements quarterly (if they direct the investments of their accounts) or annually (if they do not direct the investments). When you receive your statement, review it and make sure all the information is correct. This information may include:
- Salary Level
- Amounts you and your employer have contributed
- Length of service with the employer
- Home address
- Social Security Number
- Designated beneficiary
- Marital status
- Your investment performance
- Fees paid by the plan and/or charged to participants. Check with your plan to see if this information is included on your investment options, benefit statements, Summary Statements of Plans, or the plan’s Annual Report (Form 5500). For more information on fees your employer may charge your account, see Chapter 7.
- Two examples of your account balances for each year are provided as estimated monthly lifetime payment streams (as a single life annuity and a qualified joint and survivor annuity).
Action Items
- Please make sure you receive the plan’s Summary Plan Description and read it to understand how the plan operates.
- Please read the other documents you receive from the plan to make sure you understand any plan changes, and check that the information on your benefit statement is accurate.
- If you are enrolled in a defined contribution plan, request information about the investment options available in the plan and learn when and how you can change your plan account investments.
- If you are in a defined contribution plan, you can use your account balance as an example of what your monthly payment might be in retirement to help you prepare for retirement.
- If you feel there is an error in the plan information, please contact the plan administrator or Human Resources.
- If your personal information changes, such as marriage, divorce, or change of address, please contact the plan administrator or Human Resources Department. Your plan documents should be kept in a safe place to prevent future problems.
- To reduce the cybersecurity risk of retirement account fraud or loss, you can take some basic steps, including regularly monitoring your online accounts, using strong and unique passwords, keeping your personal contact information up to date, being wary of phishing attacks, and knowing how to report any cybersecurity incidents.
Chapter 4: Benefits
Once you understand what type of plan you have, how to get your benefits, and what your benefits will be, it’s important to understand when and how you’ll get them.
When can I start receiving retirement benefits?
There are a few things to keep in mind when determining when you can receive benefits:
- Federal law provides guidelines for when plans must begin paying retirement benefits, as shown in Table 7 below.
- Plans can choose to start paying benefits earlier. Plan documents will tell you when you can start receiving payments from your plan.
- You must make a claim for benefits before payments can start. This can take some time for administrative reasons. (See Chapter 6)
| Under federal law, your plan must allow you to start receiving benefits* | ||
|---|---|---|
| The following later time – | or– | or– |
| Reach age 65, or your plan’s normal retirement age (if earlier) | 10 years of service | Termination of your service with your employer |
*For administrative reasons, benefits do not begin immediately after these conditions are met. At a minimum, your plan must provide that you will begin receiving benefits within 60 days after the end of the plan year in which the conditions are met. Otherwise, you will need to file a claim according to your plan’s procedures. (See Chapter 6.)
In some cases, your benefit payments may be suspended if you continue to work after you are past normal retirement age. The plan must notify you of this during the first calendar month or pay period in which benefits are suspended. This information should also be included in the Summary Statement of the Plan . The plan must tell you about its procedures for requesting a pre-determination of whether a certain type of rehire will result in a suspension of benefit payments. If you are a retiree and are considering accepting a job, you may wish to write to your plan administrator to ask if your benefits will be suspended.
Table 7 shows the general requirements for when benefits begin. Some of the permitted changes are listed below:
- While defined benefit plans and money purchase plans generally allow you to collect benefits only when you reach the plan’s retirement age, some plans have provisions for early retirement.
- 401(k) plans generally allow you to access your account balance when you leave your job.
- A 401(k) plan may allow you to take distributions while you are still working, either when you are 59 1/2 or when you experience a hardship.
- Profit-sharing plans may allow you to receive benefits to which you have vested after a certain number of years or when you leave employment.
- Phased retirement options allow employees at or near retirement age to reduce their work hours to part-time, collect benefits, and continue to earn additional money.
- ESOPs are not required to pay any benefits until one year after the plan year in which you retire, or up to six years if you leave employment for reasons other than retirement, death or disability.
warn
- If you take the money out before age 59 1/2, you’ll likely owe current income taxes — and possibly a tax penalty, unless you roll the money into an IRA or other tax-qualified retirement plan.
- Taking all or part of the money out of your account before retirement age means your retirement benefits will be reduced.
When is the latest you can start receiving your benefit payments?
Federal law sets a mandatory date by which you must begin taking your retirement benefits, even if you want to wait longer. This mandatory start date is usually set as April 1 of the calendar year following the year you turn 72, or your retirement date if it is later. However, your plan may require you to begin taking distributions even if you have not retired by age 72. If you turn 70 1/2 before 2020, you may be required to take minimum distributions in 2021, even if you are not yet 72.
How benefits are paid
If you are in a defined benefit or money purchase plan, the plan must pay your benefits as a life annuity, which means you will receive regular equal payments (usually monthly) for the rest of your life. Defined benefit and money purchase plans may also have other payment options, so ask the plan. If you are in a defined contribution plan (not a money purchase plan), the plan may pay your benefits as a lump sum or may offer other options, including payments over a period of time (such as 5 or 10 years) or monthly annuity payments for life.
If you die before your spouse, will your spouse continue to receive benefits?
In a defined benefit plan or money purchase plan, the benefits include a survivor benefit unless you and your spouse elect otherwise. This survivor benefit is called a qualified joint and survivor annuity ( QJSA ), and it is paid throughout your and your spouse’s lifetime. The surviving spouse must receive at least half of the benefits received during the marriage. Survivor benefits are usually 50 percent, but some plans offer other options, such as 75 percent. Note that your monthly benefit will be reduced because benefits will continue for the rest of your spouse’s life if you die first.
If you choose not to take survivor benefits, you can only take them while you live. You need to follow specific rules to waive survivor benefits. You and your spouse must be given a written description of eligible joint and survivor annuities. You must make the written waiver within certain time limits, and your spouse must sign a written consent form agreeing to an alternative payment without survivor benefits, stating that you both understand that benefits will end when you die. Your spouse’s signature must be witnessed by a notary public or plan representative.
In most 401(k) and other defined contribution plans, the plans are written differently and the protections that apply to surviving spouses are different. In most defined contribution plans, if you die before you receive your benefits, they will automatically pass to your surviving spouse. If you want to choose a different beneficiary, your spouse must sign a waiver in the presence of a notary public or a plan representative to consent.
If you were single when you signed up for the plan and subsequently married, be sure to notify your employer and/or plan administrator of any changes to your status in the plan. If you do not have a spouse, it is important to designate a beneficiary.
Can I borrow from my 401(k) account?
401(k) plans can make loans to participants, but they are not required to do so. The interest rate on the loan must be reasonable and adequately secured. The plan must include procedures for applying for a loan and the plan’s policy for granting loans. The loan amount is limited to the lesser of 50% of your account balance or $50,000 and must be repaid within 5 years (unless the loan is for the purchase of a primary residence).
If you are not yet 65, or have not reached your planned normal retirement age, but you are facing severe financial hardship, can you take a distribution from your plan?
To reiterate, defined contribution plans can provide hardship distributions, but they are not required to do so. Check your plan’s brochure to see if your plan allows this and under what circumstances.
Action Items
- Learn when and how to claim your benefits in retirement.
- Complete the necessary forms to update your retirement plan information.
- Notify your retirement plan of any changes in address or marital status.
- Keep all documents, including the Plan Summary Statement, company memorandum, and personal benefit statements for your records.
- For tax information, visit IRS.gov/retirement , click on Forms & Publications , and see IRS Publication 575 ( Pension and Annuity Income ).
Chapter 5: Retirement benefits move with you
If you leave your company before reaching retirement age, whether you can withdraw these benefits or roll them into another tax-qualified plan or account will depend on the type of plan you participate in.
If you leave your job before retirement, do your retirement benefits transfer with you?
If you are in a defined benefit plan ( other than a cash balance plan ), your benefits will likely have to remain in the retirement plan until you are eligible to receive them. Therefore, it is very important that you regularly update your personal information with the plan administrator and stay informed of any changes in ownership or address of your former employer.
If you are in a cash balance plan, you may have an option to transfer at least a portion of your account balance to an IRA or a new employer’s plan.
If you’re in a defined-contribution plan , such as a 401(k) , and you leave your job before reaching retirement age, in most cases you can roll your account balance out of your employer’s plan.
What are my options for transferring defined contribution benefits?
- Lump sum payment – You can choose to receive your benefit from the plan as a lump sum payment, which is essentially cashing out your account. You may have to pay income tax on the amount you receive and may have to pay a penalty.
- Rollover to Another Retirement Plan – You can ask your employer to transfer your account balance directly to your new employer’s plan if the plan accepts such transfers.
- Rollover to IRA – You can ask your employer to transfer your account balance directly into an Individual Retirement Account ( IRA ).
- If your account balance is less than $5,000 when you leave your employer, the plan can make distributions immediately without your consent. If the distribution is more than $1,000, the plan must automatically roll the funds into an IRA of its choice , unless you decide to take a lump sum payment or roll it into an IRA of your choice . The plan must first give you notice to allow you to make other arrangements, and must follow rules about what type of IRA you can use (i.e., you can’t combine the distributed funds with savings you’ve deposited directly into your IRA ). The rollover must be to an organization that’s qualified to offer IRAs. In addition, the rollover IRA must have principal-protected investments. IRA providers can’t charge more fees and expenses for such plans than they do for other IRA clients.
Please note: If you choose to take a lump sum instead of rolling it into another retirement account (employer plan or IRA plan other than Roth IRA ), you will face a tax penalty if you are under 59 1/2 years old and do not meet certain exceptions. In addition, your living expenses may be reduced during retirement. Rolling your retirement plan account balance to another plan or IRA when you leave your job can protect the tax advantages of your account and preserve your benefits after retirement.
What happens if you leave and then come back?
If you leave an employer after working for several years and then return, you may be able to count those years toward vesting . Generally, if you return within five years of leaving, the plan must retain your accumulated service years. Service years are the years of service that are counted toward vesting . Because these rules are very specific, you should read your plan documents carefully and discuss them with your plan administrator if you are planning to leave for a short period of time. If your separation date was before January 1, 1985, different rules apply.
If you return to work for your former employer after retirement, you must be allowed to continue to accrue additional benefits up to the plan’s limit on total years of service credited to the plan.
Action Items
- If you leave your job before retirement, find out if you can roll your benefits into a new plan or IRA .
- If you left your benefits on a plan with a former employer, make sure your contact information with your former employer is up to date and keep track of your employer’s contact information.
- If you’re considering taking your benefit as a lump sum, you should understand what taxes and penalties will apply and plan how you’ll make up the income in retirement.
Chapter 6: Making an Application for Benefits
Federal retirement laws require all plans to have reasonable written procedures for processing benefit applications and appeals if an application is denied. Your plan’s application procedures should be included in the Summary Plan Description ( SPD ) . Usually, you can fill out the required documents and submit them to the plan administrator , who will tell you what your benefits are and when they will start.
Make an application or lodge a complaint
If you have questions or disagreements about whether you qualify for benefits or the amount you should receive, check the program’s application procedures. The application procedures required by federal law are summarized below:
Chapter 7: Responsibilities of Plan Trustees
In every retirement plan, there are individuals or groups who use their own judgment or discretion in administering the plan or who have actual control over the plan’s assets. These individuals or groups are called plan fiduciaries . Fiduciary status is based on the functions this person performs for the plan, not just their title.
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Does your program have to identify the people who will be responsible for operating the program?
A plan must designate at least one trustee, either in the written plan document or through the procedures described in the plan, who has control over the operation of the plan. The trustee may be an office or an individual. In some plans, the trustee may be an executive committee or a corporate board of directors. The trustees of a plan will usually include the trustee , investment manager, and plan administrator . If you have questions about a plan, it is best to contact the plan administrator first.
What are the responsibilities of a plan trustee?
Trustees have significant responsibilities as they act on behalf of the plan participants and are therefore subject to certain standards of conduct. Their duties include:
- Act solely in the interests of plan participants and their beneficiaries for the sole purpose of providing benefits to them;
- Should perform duties with skill, care and diligence;
- Comply with plan documents (unless inconsistent with ERISA );
- diversify planned investments;
- only pay the reasonable expenses of administering the plan and investing its assets; and
- Avoid conflicts of interest.
Fiduciaries are also responsible for selecting investment providers and investment options and monitoring their performance. Some plans, such as most 401(k) plans or profit-sharing plans , may be structured to allow participants to choose the investments in their accounts within certain investment options offered by the plan. If the plan is properly structured to give participants control over their investments, fiduciaries are not liable for losses resulting from participants’ investment decisions. The Department of Labor’s rules provide guidance to ensure that participants have enough information about their investment options so that they can make informed decisions. This information includes:
- A description of each investment option, including investment objectives, risk and return characteristics;
- information about any appointed investment managers;
- Instructions on when and how to apply to make changes to your investments, and any restrictions on when you can change your investments;
- a statement of fees that may be charged to your account when you change investment options, buy or sell;
- The name, address, and telephone number of the plan trustee or other person designated to provide certain additional information upon request; and
- A statement that the plan will follow Department of Labor rules and that the trustee will be indemnified from liability for direct and consequential losses resulting from the investment instructions of the participants.
For various types of automatic enrollment plans, such as automatic enrollment 401(k) plans , plan fiduciaries will select investments for employees’ automatic contributions if the employee does not provide instructions. If the plan is properly set up to use certain default investment options that generally minimize the risk of large losses and provide long-term growth, and to provide notice of the plan’s automatic enrollment process, the fiduciaries can be protected from liability for losses resulting from investments in those default options. Plans must also offer participants a variety of investment options from which to choose, and must provide information about those investments so that participants can make an informed decision. The Department of Labor’s rules include guidance on the default investment options that may be used and the notices and information that must be provided to participants.
What happens if a plan fiduciary fails to meet his or her responsibilities?
A fiduciary who fails to comply with the provisions of the code of conduct may be held personally liable. If the plan loses money because its fiduciary violated their duties, the fiduciary may be required to recoup those losses or disgorge any profits that were made through improper conduct. For example, if an employer does not roll over a participant’s 401(k) contributions to the plan, they may have to reimburse the plan for the contributions, plus any lost earnings, and return any ill-gotten gains. A fiduciary may also be removed from his or her position as a fiduciary if he or she fails to comply with the code of conduct.
When does the employer need to deposit the employee’s contributions into the plan?
If you contribute to your retirement plan through payroll deductions, your employer must follow certain rules to make sure contributions are deposited on time. The law requires that employers deposit participants’ contributions as soon as reasonably possible, separating them from the company’s assets, but no later than the 15th business day of the month following payday. For small plans (those with fewer than 100 participants), payroll deductions are considered in compliance no later than the 7th business day after the employer withholds them. Plan administrators must include information on whether contributions are deposited on time in their Annual Report (Form 5500). For more information, see the Department of Labor’s Ten Warning Signs That Your 401(k) Contributions Are Being Misused , which can tell you if your contributions may be late.
What are the obligations of the plan trustee with respect to fees and expenses paid by the plan? Can the plan charge fees on my defined contribution plan account?
Plan fiduciaries are required to take into account the operating costs and expenses paid by your plan. The fiduciary regulations under ERISA mentioned above mean that fiduciaries must:
- Establishing a prudent process for selecting investment alternatives and the scheme’s service providers;
- Ensure that fees paid to service providers and other program expenses are reasonable based on the level and quality of services provided;
- Choose prudent, well-diversified investment options; and
- Monitor investment alternatives and service providers to ensure the continued appropriateness of relevant selections.
The plan may deduct plan administration fees and investment fees from your defined contribution plan account, either directly or indirectly from the investment income in your account. Fees for personalised services, such as processing a plan loan or a Qualified Domestic Relationship Order (see Chapter 9), may also be deducted from your account.
If you direct the investments in your account, your plan will provide information about your rights and responsibilities in the plan with respect to directing investments. This includes information about the plan and investments, as well as information about fees and expenses, which you need to make informed decisions about managing your account. Information about investments is provided in the form of charts and graphs that facilitate comparisons among the different investment options in the plan. The plan should provide this information before you direct your first investment, annually thereafter, and at least quarterly information about actual fees and expenses paid.
Chapter 8: Your Benefits During Plan Termination or Corporate Merger
As mentioned at the beginning of this booklet, employers do not have to offer retirement plans, and they can modify and/or terminate plans.
What happens when the plan ends?
Federal law provides some protections for employees who are participants in terminated defined benefit and defined contribution plans. When a plan is terminated, 100% of the accrued benefits must be vested for current employees. This means that you are entitled to all benefits that were earned when the plan was terminated, even those that do not vest or will not vest when you leave your employment. If a plan is partially terminated (for example, if your employer closes a facility or division, resulting in the termination of employment for a significant portion of the plan participants), 100% of the benefits must be vested immediately for the affected employees (up to the level of funding for the plan).
What happens if a terminated defined benefit plan does not have sufficient funds to pay benefits?
The federal government insures most private defined benefit plans through the Pension Benefit Guaranty Corporation ( PBGC ). For terminated defined benefit plans that do not have sufficient funds to pay all benefits, the PBGC guarantees payment of vested benefits up to the limits required by law.
What happens if a defined contribution plan is terminated?
The PBGC does not guarantee benefits in defined contribution plans. If you are in a defined contribution plan that is in the process of being terminated, the plan trustee and fiduciary will maintain the plan until they terminate the plan and pay out the assets.
If your plan is merged with another plan, are your accrued benefits protected?
If your company merges with another, your plan rules and investment options may change. Your employer may choose to merge your plan with another plan. If your plan is terminated as a result of a merger, your accrued benefits may not be reduced. You must receive benefits at least equal to the benefits you received before the merger. In defined contribution plans, the value of your account after the merger may still fluctuate depending on investment performance.
The consolidation of multi-employer defined benefit plans is subject to special rules and is generally governed by the PBGC . Contact the PBGC for more information .
What if your employer goes bankrupt?
Generally, your retirement assets are not at risk if your employer declares bankruptcy. Federal law requires retirement plans to adequately fund promised benefits and to keep plan assets separate from the employer’s business assets. Funds must be held in trust or invested in insurance contracts. Creditors of the employer cannot make claims against retirement plan funds. However, you should confirm that any contributions your employer deducts from your paycheck are promptly transferred to the plan’s trust or insurance contract.
Major business events such as bankruptcy, mergers and acquisitions may cause employers to abandon their individual account plans (such as 401(k) plans ), leaving them without a plan trustee to administer them. In these situations, participants often have difficulty collecting their benefits and have no one to answer their questions. Custodians, such as banks, insurance companies and mutual fund companies, can only hold the assets of these plans but do not have the power to terminate the plans and distribute assets. In response, the Department of Labor has issued a rule creating a voluntary process by which custodians can wind down the plan’s operations, distribute benefits and terminate the plan.
Chapter 9: Potential Application for Your Benefits (Divorce)
Your retirement plan is generally safe from claims by others. If you owe money to a creditor, he or she cannot claim the funds in your retirement plan. For example, if you leave your employer and roll your 401(k) account into an individual retirement account ( IRA ), creditors generally cannot access those IRA funds even if you declare bankruptcy .
Federal law does provide exceptions for family support and property division in divorce. For many workers, retirement savings are one of their most important assets. Therefore, whether and how to divide retirement plan participants’ benefits is often an important consideration in separation, divorce, and other domestic relations proceedings. While the division of marital property is generally governed by state domestic relations statutes, any distribution of retirement benefits must also comply with federal law, particularly ERISA and the Internal Revenue Code.
Courts in various states can award part or all of a participant’s retirement benefits to a spouse, ex-spouse, child, or other dependent. The recipient named in the order is called an alternate payee. The specific order the court issues is called a domestic relations order and can be in the form of a state court judgment, decree, or order, or the court’s approval of a property settlement agreement. The order must cover child support, divorce maintenance, or marital property rights and must be made under the state’s domestic relations statutes.
The Plan Administrator determines whether the order is a Qualified Domestic Relations Order ( QDRO ) as described in the Plan Rules and notifies the Participant and Alternate Payee.
The order must contain the following information to constitute a QDRO :
- The name and last known mailing address of the participant;
- The name and last known mailing address of each alternate payee;
- Name of the scheme;
- Determine the amount or percentage of benefits to be paid to alternate payees, or the method of determining the amount or percentage; and
- The number of payments or time period to which the order applies.
The specific content of the remainder of the order will depend on the type of retirement plan, the nature of the participant’s benefits, the purpose of issuing the order, and the intent of the parties drafting the order. The terms of a QDRO must address the type or form of benefits already permitted under the plan; it cannot require a plan to provide more benefits. Generally, a QDRO may allocate survivor benefits to a former spouse. Participants and alternate payees drafting a QDRO should read the plan’s Summary Plan Statement and other plan documents to understand the survivor benefits under the plan. A QDRO cannot require a plan to pay a benefit to another alternate payee if the benefit must be paid to that alternate payee under a previously confirmed QDRO under the plan.
If the participant is still employed, the QDRO may require payments to the alternate payee to begin on or after the earliest retirement age the participant could reach under the plan.
Chapter 10: What to do if you have problems
Sometimes retirement plan administrators, managers, and others involved with the plan make mistakes. Here are some examples:
- Your 401(k) or personal account statements are always late or sent at irregular intervals;
- Your account balance appears to be inaccurate;
- your employer fails to transfer your contributions to the plan on time;
- your plan administrator fails to provide or send you a copy of the Summary Statement of Plan ; or
- Benefits were calculated incorrectly.
It is important for you to understand that the law prohibits employers from terminating or disciplining employees to avoid paying benefits, to retaliate against employees for exercising any rights under a plan or the Federal Retirement Insurance Act ( ERISA ), or for providing information or testimony in any ERISA- related investigation or proceeding.
Start with your employer and/or plan administrator
If you discover an error or have questions, you can first look for information in the Plan Summary Description. In addition, you can contact your employer and/or plan administrator to ask them to explain what happened and/or make corrections.
Is it possible to bring a lawsuit under ERISA ?
Yes, you have the right to bring an action against your plan and its fiduciaries to enforce or clarify your rights under ERISA and your plan if:
- Appeal a denied benefit application after fully completing the program’s application review process;
- to recover benefits to which you are entitled;
- clarify your rights to future benefits;
- Get access to program documents that you have previously requested in writing but have not received;
- addressing a breach of duty by a scheme trustee; or
- Prevent a plan from continuing any action or practice that violates the terms of the plan or ERISA .
What is the role of the Department of Labor?
The Employee Benefits Security Administration ( EBSA ) of the U.S. Department of Labor is responsible for enforcing the provisions of ERISA regarding the conduct of plan fiduciaries, the investment and protection of plan assets, the reporting and disclosure of plan information, and the benefit rights and responsibilities of participants.
However, ERISA does not cover all retirement plans. For example, it does not cover plans owned by federal, state or local governments and some church plans.
The Department of Labor’s enforcement approach includes informally resolving benefit disputes, conducting investigations, and seeking to correct violations, including filing lawsuits when necessary.
The Department has Benefits Advisors who provide personalised assistance to participants and beneficiaries. Participants can get information about their rights and responsibilities under the law and help in getting the benefits to which they are entitled.