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Chapter 1: ERISA, Retirement Plan, and Your Retirement Income

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Corporate and Institutional Investors

This chapter 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.

These questions are addressed:

What Is ERISA?
What are defined benefit and defined contribution plans?
What Are Savings Incentive Match Plans for Employees of Small Employers (SIMPLE IRAs)?
What are profit sharing plans or stock bonus plans?
What are 401k plans?
What are employee stock ownership plans (ESOPs)?
What is the role of the Labor Department in regulating retirement plans?
What other Federal agencies regulate retirement plans?

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 non-forfeitable 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 plans 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 booklet.

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 401k 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 SEP Plans (Simplified Employee Pension Plans)?
What Are SIMPLE IRAs (Savings Incentive Match Plans for Employees of Small Employers)?

See SEP IRA / SIMPLE IRA for more information

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 401k plan. What are 401k plans?

Your employer may establish a defined contribution plan that is a cash or deferred arrangement, usually called a 401k plan. You can elect to defer receiving a portion of your salary which is instead contributed on your behalf, before taxes, to the 401k plan. Sometimes the employer may match your contributions. There are special rules governing the operation of a 401k 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 may be 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, a 401k 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 401k 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

*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 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

Source: Department of Labor