retirement plan basics

You will usually be eligible for your employer’s retirement plan after you've worked there for at least one year and for at least 1000 hours. Employers usually offer two basic types of retirement plans: defined contribution plans or defined benefit retirement plans.

Retirement plans: Defined contribution and defined benefit plans:

Defined contribution retirement plans involve annual contributions made for each employee by the employer. The contribution can be up to 15% of the amount you (the employee) put into your plan. The benefit you receive is the vested amount (the amount you completely own) plus the amount of investment income earned. Examples of these types of retirement plans include 401(k)’s, 403 (b)’s, employee stock ownership plans, profit-sharing plans, and money-purchase pension plans (in which the employer must contribute a specific amount of money each year). Ultimately you receive the amount you contribute plus investment gains and losses. The amount in your retirement plan frequently fluctuates in relation to changes in the value of your investments.

Defined benefit retirement plans are the most traditional plans and are characterized by employer contributions which are determined by actuarial tables based on your salary as well as your years of employment.

Some of the more typical retirement plan accounts you might have include the following:

Simplified Employee Pension Plans (SEP): Retirement plans in which the employee sets up an Individual Retirement Plan(IRA) and employer then makes contributions (up to 15% of your pay) to it.
401(k): The employee defers receiving part of their pay, which is then placed in an account of payment and is untaxed until sometime in the future.

Retirement plan- ERISA and the vesting process:

Retirement plans are governed by a federal law referred to as ERISA (Employee Retirement Income Security Act). Each year you should receive a summary which shows you how your pension account is being invested as well as the return on investment.

You must become vested in order to be qualified to receive your benefits. Once you become vested you become the owner of the funds in the account, even if you leave the company before reaching full retirement age. Vesting is a gradual process which occurs over time. If after three years you're 20% vested, you are then the owner of 20% of the funds in your account. Most retirement plans require you to be in a job for five to seven years to become completely vested. If you leave that job before you are completely vested, you will then lose the unvested amount in your account. Retirement plans may be very different. You should always make sure that you understand the rules before you make major changes to your retirement plan or employment.

You must start to receive benefits from your account within 60 days of turning 65 years old or, if earlier, than normal retirement age according to your retirement plan; the end of the 10th year after you began participation in the retirement plan; or, after you have left your job, whichever occurred last.

Information from Senior’s Rights by Brett McWhorter Sember

Web page and additional information by Paul Susic MA Licensed Psychologist Ph.D. Candidate - Clinical Director Senior Care Psychological Consulting.