The Employee Retirement
Income Security Act (ERISA) covers two types of pension plans: defined
benefit plans and defined contribution plans.
A defined benefit plan promises 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 average salary for the last 5 years of
employment for every year of service with an employer. The benefits in most
traditional defined benefit plans are protected, within certain limitations, by
federal insurance provided through the
Benefit Guaranty Corporation (PBGC).
A defined contribution plan, on the other hand, does not promise a
specific amount of benefits at retirement. In these plans, the employee or the
employer (or both) contribute to the employee's individual account under the
plan, sometimes at a set rate, such as 5 percent of earnings annually. These
contributions generally are invested on the employee's behalf. The employee
will ultimately receive the balance in their account, which is based on
contributions plus or minus investment gains or losses. The value of the
account will fluctuate due to the changes in the value of the investments.
Examples of defined contribution plans include 401(k) plans, 403(b) plans,
employee stock ownership plans, and profit-sharing plans.
A Simplified Employee Pension Plan (SEP) is a relatively
uncomplicated retirement savings vehicles. A SEP allows employees to make
contributions on a tax-favored basis to individual retirement accounts (IRAs)
owned by the employees. SEPs are subject to minimal reporting and disclosure
requirements. Under a SEP, an employee must set up an IRA to accept the
employer's contributions. Employers may no longer set
up Salary Reduction SEPs. However, employers are permitted to establish SIMPLE
IRA plans with salary reduction contributions. If an employer had a salary
reduction SEP, the employer may continue to allow salary reduction
contributions to the plan.
A Profit Sharing Plan 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
include a 401(k) plan.
A 401(k) Plan is a defined contribution plan that is a cash or
deferred arrangement. Employees can elect to defer receiving a portion of their
salary which is instead contributed on their behalf, before taxes, to the
401(k) plan. Sometimes the employer may match these contributions. There are
special rules governing the operation of a 401(k) plan. For example, there is a
dollar limit on the amount an employee may elect to defer each year. An
employer must advise employees of any limits that may apply. Employees who
participate in 401(k) plans assume responsibility for their retirement income
by contributing part of their salary and, in many instances, by directing their
An Employee Stock Ownership Plan (ESOP) is a form of defined
contribution plan in which the investments are primarily in employer stock.
A Money Purchase Pension Plan is a plan that requires fixed
annual contributions from the employer to the employee's individual account.
Because a money purchase pension plan requires these regular contributions, the
plan is subject to certain funding and other rules.
A Cash Balance Plan is a defined benefit plan that defines the
benefit in terms that are more characteristic of a defined contribution plan.
In other words, a cash balance plan defines the promised benefit in terms of a
stated account balance. In a typical cash balance plan, a participant's account
is credited each year with a "pay credit" (such as 5 percent of compensation
from his or her employer) and an "interest credit" (either a fixed rate or a
variable rate that is linked to an index such as the one-year treasury bill
rate). Increases and decreases in the value of the plan's investments do not
directly affect the benefit amounts promised to participants. Thus, the
investment risks and rewards on plan assets are borne solely by the employer.
When a participant becomes entitled to receive benefits under a cash balance
plan, the benefits that are received are defined in terms of an account
balance. The benefits in most cash balance plans, as in most traditional
defined benefit plans, are protected, within certain limitations, by federal
insurance provided through the
Benefit Guaranty Corporation (PBGC).
DOL Web Pages on This
on Pension Plans
Publications and other materials providing information
about your rights as pension plan participants under federal pension law.
Provides publications and other materials designed to assist
employers and employee benefit plan practitioners in understanding and
complying with the requirements of ERISA as it applies to the administration of
employee pension and health benefit plans.
A Look at
401(k) Fees for Employers
Provides information to help you ask the right
questions to better understand and evaluate the fees and expenses related to
Retirement Plan Fees And Expenses
Provides information about plan fees,
including ten questions to help you gather information about your 401(k)
401(k) Plan Fees Disclosure
Provides employers with a way to get uniform information on
fees from prospective plan service providers to make apples to apples
comparisons of prospective plan service providers.
Balance Plans: Questions and Answers
Provides answers to commonly asked
questions about cash balance plans.
Pension and Health Care Coverage: Questions and Answers for Dislocated
Provides answers to commonly asked questions from dislocated
workers about their pension and health plan benefits.
QDROs: The Division of Pensions
through Qualified Domestic Relations Orders
QDROs are domestic
relations orders that recognize the existence of an alternate payee's right to
receive benefits payable to a participant under a pension plan. This fact sheet
provides questions and answers on QDROs.
ERISA Filing Acceptance
The EFAST system streamlines filing and processing of the
annual return/report forms through the use of computer scannable forms and
electronic filing technologies. This Web site provides assistance on using this
Simplified Employee Pensions: What Small Businesses Need to Know
Describes an easy, low-cost retirement plan option for employers.
Retirement Solutions for Small Businesses
Provides information about
retirement plan options for small businesses.
Savings Incentive Match
Plan for Employees of Small Businesses
Provides information about the
basic features and requirements of SIMPLE plans that involve individual
retirement accounts or annuities (SIMPLE IRAs).
What You Should Know
About Your Pension Rights
Provides information to help answer many of
the most common questions about pension plans.
Bankruptcy: How Will it Affect Your Employee Benefit?
information on bankruptcys effect on pension plans and group health