Automatic enrollment: As soon as eligibility requirements are met, employees are automatically covered under a plan whose coverage they have the right to decline at any time. Usually, a minimum default employee contribution is set, but employees may choose to contribute a different percentage.
Benefit payment methods: Payments from defined benefit plans may be in the form of a straight life annuity, a joint-and-survivor annuity, a percentage of the unreduced accrued benefit, or a lump sum.
Career earnings formulas: Benefits are based on a percentage of an average of career earnings for every year of service recognized by the plan.
Cash balance plans: Benefits are computed as a percentage of each employee's account balance. Employers specify a contribution, and a rate of interest on that contribution, that will provide a set amount at retirement, generally as a lump sum.
Cliff vesting: No vesting occurs until an employee satisfies the service requirements for 100 percent vesting; for example, 5 years.
Common stock fund: This is a professionally managed fund invested in the common stock of a variety of companies.
Company stock: Employees receive equity in the company that sponsors the defined contribution plan.
Defined benefit plans: Defined benefit pension plans provide employees with guaranteed retirement benefits based on benefit formulas. A participant's retirement age, length of service, and preretirement earnings may affect the benefits received.
Defined contribution plans: Defined contribution plans are retirement plans that specify the level of employer contributions and place those contributions into individual employee accounts.
Disability retirement: Disability retirement is retirement resulting from a totally disabling injury or illness prior to eligibility for early or normal retirement. Plans providing disability retirement benefits may have a service requirement of 10 years or more. Benefits may be immediate or deferred.
Diversified investments: Investment in more than one type of equity or debt instrument.
Dollar amount formulas: Benefits are based on a dollar amount per month for each year of service recognized by the plan.
Early retirement: Early retirement is the age (or a combination of age and service) at which plan participants may retire and receive all accrued benefits, minus a reduction for the number of years by which their retirement age precedes their normal retirement age.
Fixed percentage of profits formula: This feature is common in deferred profit sharing plans. The employer contributes a fixed percentage of total annual profits to the plan. For example, no matter what the level of profits, 5 percent is contributed to the plan. Profits may include those for the entire company or just those in a specific business unit. In a variation of this formula, employers set aside a reserve amount of profits (for example, $1 million) and pay only a fixed percentage of any profits above this amount into the employees' defined contribution plan.
Fixed-interest securities.: These securities include bonds and other non-federal instruments that pay a fixed interest rate over a predetermined period.
Frozen retirement plans: Benefit plans that typically are closed to new enrollees and may limit future benefit accruals for some or all active plan participants. These plans may be of different types. Some may no longer allow participants to accrue additional benefits. Others may change the plan's prospective benefit formula in such a way as to limit future benefit accruals. Others may use a prospective benefit formula to limit or cease accruals of benefits for some of the active participants.
Graded vesting: Vesting refers to the amount of time a participant must work before earning a nonforfeitable right to a retirement benefit. With graded vesting, an employee's nonforfeitable percentage of employer contributions increases over time, until vesting reaches 100 percent.
Immediate full vesting: Employees are immediately eligible to receive 100 percent of employer contributions.
Integration with Social Security: Defined benefit plans may integrate retirement benefits with Social Security benefits. Under this approach, the employer's contribution to Social Security (FICA taxes) is taken into account when plan benefits are computed. Integration may be accomplished by an offset or a step-rate method.
Joint-and-survivor annuity: The Employee Retirement Income Security Act of 1974 (ERISA) requires defined benefit pension plans that offer an annuity as a payment option to provide a qualified joint-and-survivor annuity (QJSA) as the normal benefit payment for married participants. A QJSA is an immediate annuity for the life of the participant and a survivor annuity for the life of the participant's spouse. The amount of the survivor annuity may not be less than 50 percent, or more than 100 percent, of the amount payable during the time the participant and spouse are both alive. The annuity payable for the life of the participant is lower than that for a straight life annuity; to account for the increased length of time over which payments will be made, this reduction may be a percentage of the straight life benefit, such as 10 percent, or may be based on the life expectancy of the participant and spouse.
Lump-sum payment: The participant may opt for a full lump sum, with no further benefits received from the plan. If a plan provides for a partial lump-sum payment, the participant will receive a reduced annuity as well.
Money market fund: This is a professionally managed mutual fund that invests in short-term Treasury bills, certificates of deposit, or corporate bonds. The fund managers sell shares to investors, who receive regular payments of interest.
Normal retirement: Normal retirement is the age at which plan participants may retire and receive all accrued benefits.
Offset: Part of a participant's Social Security benefit is subtracted from the benefit otherwise payable by the plan. The maximum allowable offset is 83.3 percent of the Social Security benefit. The most common offset is 50 percent.
Pension equity plans: Under these plans, for each year of work, employees are credited with a percentage applied to their final average earnings. Benefits are generally disbursed as a lump sum.
Percentage of employee earnings: The employer contributes a fixed percentage of each employee's earnings to his or her individual account. This feature is common in money purchase plans.
Percentage of unreduced accrued benefit: Under this method, the participant's pension is not reduced to adjust for survivor benefits. The participant will receive an amount equal to the straight life annuity, and the spouse will receive a proportion of that amount, often 50 percent, should the participant die.
Percentage-of-contribution formulas: Benefits are based on employer and, occasionally, employee contributions. Benefits equal a percentage of total contributions.
Portability: Portability is a participant's ability to maintain and transfer accumulated pension benefits when changing jobs. Portability provisions in defined benefit plans generally cover portability of assets, portability of credited service, or both.
Portability of assets: A feature that allows participants to withdraw their accumulated pension benefits or transfer them to another retirement arrangement.
Portability of credited service: A feature allowing participants to count the years of service with a previous employer when determining benefits from their current employer.
Specified matching percent: This feature is common in savings and thrift plans. The employer matches a specified percentage of employee contributions. The matching percentage can vary by length of service, amount of employee contribution, and other factors.
Step rate: Used when defined benefit plans integrate retirement benefits with Social Security benefits. Lower benefit rates are applied to earnings up to the specified taxable Social Security wage base (that is, the earnings subject to Social Security tax); higher benefit rates are applied to earnings above the wage base.
Straight life annuity: A periodic payment made for the life of the retiree, with no additional payments to survivors.
Terminal-earnings formulas: Benefits are based on a percentage of average earnings during a specified number of years at the end of a worker's career (or when earnings are highest), multiplied by the number of years of service recognized by the plan.
Vesting: Vesting refers to the amount of time a participant must work before earning a nonforfeitable right to a retirement benefit. Once the participant is vested, the accrued benefit is retained even if the worker leaves the employer before reaching retirement age. Under ERISA, defined contribution plans are subject to the same vesting rules as defined benefit plans, but vesting schedules vary. Vesting schedules apply only to employer contributions; employee contributions (including pretax contributions) are always 100 percent vested.