Retirement Savings Plan

Part 2: Earning Retirement Benefits

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Retirement Planning and retirement plans

Once you have learned what type of retirement plan your employer offers, you need to find out when you can participate in the plan and begin to earn benefits. Plan rules can vary as long as they meet the requirements under Federal law. You need to check with your plan or review the plan booklet (Summary Plan Description) to learn your plans rules and requirements. Your plan may require you to work for the company for a period of time before you may participate in the plan. In addition, there typically is a time frame for when you begin to accumulate benefits and earn the right to them (sometimes referred to as vesting).

Who can participate in your employers retirement plan?
Find out if you are within the group of employees covered by your employers retirement plan. Federal law allows employers to include certain groups of employees and exclude others from a retirement plan. For example, your employer may sponsor one plan for salaried employees and another for union employees. Part-time employees may be eligible if they work at least 1,000 hours per year, which is about 20 hours per week. So if you work part-time, find out if you are covered.

When can your participation begin?
Once you know you are covered, you need to find out when you can begin to participate in the plan. You can find this information in your plans Summary Plan Description. Federal law sets minimum requirements, but a plan may be more generous. Generally, a plan may require an employee to be at least 21 years old and to have a year of service with the company before the employee can participate in a plan. However, plans may allow employees to begin participation before reaching age 21 or completing one year of service. For administrative reasons, your participation may be delayed up to 6 months after you meet these age and service criteria, or until the start of the next plan year, whichever is sooner. The plan year is the calendar year, or an alternative 12-month period, that a retirement plan uses for plan administration. Because the rules can vary, it is important that you learn the rules for your plan.

Employers have some flexibility to require additional years of service in some circumstances. For example, if your plan allows you to vest (discussed in detail later in this chapter) immediately upon participating in the plan, it may require that you work for the company for two years before you may participate in the plan.

Federal law also imposes other participation rules for certain circumstances. For example, if you were an older worker when you were hired, you cannot be excluded from participating in the plan just because you are close to retirement age.

Some 401k plans enroll employees automatically. This means that you will automatically become a participant in the plan unless you choose to opt out. The plan will deduct a set contribution level from your paycheck and put it into a predetermined investment. If your employer has a 401k plan, find out whether your plan has automatic enrollment, the date your participation begins, and where the funds are invested. Plans with automatic enrollment must provide you an opportunity once a year to change the contribution rate or to opt out of the plan. (Note: Check your plan booklet for information on when you may change your investment choices.)

When do you begin to accumulate benefits?
Once you begin to participate in a retirement plan, you need to understand how you accrue or earn benefits. Your accrued benefit is the amount of retirement benefits that you have accumulated or that have been allocated to you under the plan at any particular point in time.

Defined benefit plans often count your years of service in order to determine whether you have earned a benefit and also to calculate how much you will receive in benefits at retirement. Employees in the plan who work part-time, but who work 1,000 hours or more each year, must be credited with a portion of the benefit in proportion to what they would have earned if they were employed full time. In a defined contribution plan, your benefit accrual is the amount of contributions and earnings that have accumulated in your 401k or other retirement plan account, minus any fees charged to your account by your plan.

Special rules for when you begin to accumulate benefits may apply to certain types of retirement plans. For example, in a Simplified Employee Pension Plan (SEP), all participants who earn at least $450 a year from their employers are entitled to receive a contribution.

Can a plan reduce promised benefits?
Defined benefit plans may change the rate at which you earn future benefits but cannot reduce the amount of benefits you have already accumulated. For example, a plan that accrues benefits at the rate of $5 a month for years of service through 2006 may be amended to provide that for years of service beginning in 2007 benefits will be credited at the rate of $4 per month. Plans that make a significant reduction in the rate at which benefits accumulate must provide you with written notice generally at least 15 days before the change goes into effect.

Also, in most situations, if a company terminates a defined benefit plan that does not have enough funding to pay all of the promised benefits, the Pension Benefit Guaranty Corporation will pay plan participants and beneficiaries some retirement benefits, but possibly less than the level of benefits promised. (For more information, see the PBGCs Web site.)

In a defined contribution plan, the employer may change the amount of employer contributions in the future. Depending on the plan terms, the employer may also be able to stop making contributions for a few years or indefinitely.

Finally, an employer may terminate a defined benefit or a defined contribution plan, but may not reduce the benefit you have already accrued in the plan.

How soon do you have a right to your accumulated benefits?
You immediately vest in your own contributions and the earnings on them. This means you have earned the right to these amounts without the risk of forfeiting them. But note there are restrictions on actually taking them out of the plan. See the discussion on the rules for distributions later in this booklet.

However, you do not necessarily have an immediate right to any contributions made by your employer. Federal law provides a maximum number of years a company may require employees to work to earn the vested right to all or some of these benefits. (See tables below showing the vesting rules).

In a defined benefit plan, an employer can require that employees have 5 years of service in order to become vested in the employer funded benefits. Employers also can choose a graduated vesting schedule, which requires an employee to work 7 years in order to be 100 percent vested, but provides at least 20 percent vesting after 3 years, 40 percent after 4 years, 60 percent after 5 years, and 80 percent after 6 years of service. The permitted vesting schedules for current defined benefit plans are shown in Table 3 below. Plans may provide a different schedule as long as it is more generous than these vesting schedules.

In a defined contribution plan such as a 401k plan, you are always 100 percent vested in your own contributions to a plan, and in any subsequent earnings from your contributions. However, in most defined contribution plans you may have to work several years before you are vested in the employers matching contributions. (There are exceptions, such as the SIMPLE 401k and the Safe Harbor 401k, in which you are immediately vested in all required employer contributions.)

Currently, employers have a choice of 2 different vesting schedules for employer matching 401k contributions, which are shown in Table 2. Your employer may use a schedule in which employees are 100 percent vested in employer contribution after 3 years of service, called cliff vesting. Under graduated vesting, an employee must be at least 20 percent vested after 2 years, 40 percent after 3 years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years.

You may lose some of the employer-provided benefits you have earned if you leave your job before you have worked long enough to be vested. However, once vested, you have the right to receive the vested portion of your benefits even if you leave your job before retirement. But even though you have the right to certain benefits, your defined contribution plan account value could decrease after you leave your job as a result of investment performance.


If you leave your company and return, you may be able to count your earlier period of employment towards the years of service needed for vesting in the employer-provided benefits. Unless your break in service with the company was 5 years or the time equal to the length of your pre-break employment, whichever is greater, you likely can count that time prior to your break. Because these rules are very specific, you should read your plan document carefully if you are contemplating a short-term break from your employer, and then discuss it with your plan administrator. If you left employment prior to January 1, 1985, different rules apply. For more information, contact the Department of Labor toll free at 1.866.444.EBSA (3272).

Vesting Rules

Table 2 below shows the current vesting schedules, as of 2002, for employer matching 401k contributions, as discussed above.

Table 3 is for employees receiving employer contributions other than matching 401k contributions, including those in a defined benefit plan. It is also for employees in a defined contribution plan who left an employer after 1988 (and for employer matching 401k contributions prior to 2002).

Table 4 is for plans you left before 1989.

Generally, an employer must count your years of service for vesting credit starting with your date of employment. Two exceptions provide that your employer may start counting your years of service with the first plan year following (1) your 18th birthday if you were under 18 years of age when you started working there, and (2) the date you start contributing to a 401k plan if you elected not to contribute when you first were eligible.

Plans can allow employees the right to employer-provided benefits sooner than indicated in the following tables.

Minimum Vesting Requirements Under ERISA
Employer Contributions
(Use Table in Effect on Date You Left Employer)

Table 2 - Effective Date 01/01/02 - Present for 401k Matching Contributions

Graduated Vesting

Years of Service Non-forfeitable Percentage
2 20%
3 40%
4 60%
5 80%
6 100%
Cliff Vesting
Less than 3 years of service - 0% Vested
At least 3 years of service - 100% Vested

Table 3 - Effective Date 01/01/89 - Present* for Other Employer Contributions

Graduated Vesting

Years of Service Non-forfeitable Percentage
3 20%
4 40%
5 60%
6 80%
7 100%
Cliff Vesting
Less than 5 years of service - 0% Vested
At least 5 years of service - 100% Vested

Table 4 - Effective Date 1974 - 12/31/88** for all Employer Contributions

Graduated Vesting

Years of Service 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 Vesting
Less than 10 years of service - 0% Vested
At least 10 years of service - 100% Vested

Rule of 45 - If employee's age and years of service total 45, then 50% of the
benefits must be vested with at least 10% vesting for each year thereafter.

For plans subject to collective bargaining agreements, the effective date is the earlier of the date on
which the last of the collective bargaining agreements under which the plan is maintained terminates or ---.

* 01/01/99

** 01/01/89

Action Items

Find out if you are covered by an employer plan.

Find out how soon you can start participating in and/or contributing to your retirement plan after you start working for a company.

Get a Summary Plan Description.

Review your plan document or Summary Plan Description to understand how you earn benefits in your plan.

Find your plans vesting schedule to check when you are fully vested. If you are thinking of changing jobs, check your plan to see if working longer will allow you to vest more fully in your employers contributions.