Introduction to Required Disclosures for Retirement and Pension Benefit Plans
ERISA
is a federal law that sets minimum standards for retirement and pension
plans in private industry. There are a number of different types of
retirement plans, including the 401(k) plan and the traditional pension
plan, known as a defined benefit plan. ERISA requires plans to provide
participants and beneficiaries with information about the plan,
including important information about plan features and funding, as well
as rules regarding the operation and management of the plan.
Pension Plans Subject to ERISA
An employee pension benefit plan is
generally a plan, fund or program established or maintained by an
employer or employee organization (or both) which by its express terms
or as a result of surrounding circumstances:
- Provides retirement income to employees, or
- Results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.
Other separation benefits, such as severance pay arrangements, may also qualify as pension plans under ERISA.
Defined Contribution Plans and Defined Benefit Plans
Generally speaking, there are two types of pension plans:
- A defined benefit plan promises participants a specified
monthly benefit at retirement, either stated as an exact dollar amount
(such as $100 per month at retirement) or, more commonly, calculated
through a plan formula that considers such factors as salary and service
(for example, 1% of average salary for the last 5 years of employment
for every year of service with an employer).
- A defined contribution plan, on the other hand, does not
promise a specific amount of benefits at retirement. In these plans, the
participant or the employer (or both) make contributions to the
participant's individual account under the plan (sometimes at a set
rate, such as 5% of earnings annually), which are generally invested on
the participant's behalf (note that the value of the account will
fluctuate due to changes in the value of investments). Examples of
defined contribution plans are 401(k) plans, 403(b) plans, employee
stock ownership plans and profit-sharing plans...