Your employer’s retirement savings plan is an
essential part of your future financial security. It is
important to understand how your plan works and what
benefits you will receive. Just as you would keep track of
money that you put in a bank or other financial
institution, it is in your best interest to keep track of
your retirement benefits.
Those responsible for the management and oversight of
your retirement plan must follow certain rules for
operating the plan, handling the plan’s money and
overseeing the firms that manage the money. You should
also understand and monitor your retirement plan and your
benefits. You will find Action Items in each chapter to
assist you in doing this.
This booklet helps you understand your plan and
explains what information you should review periodically
and where to go for help with questions. It includes
Different types of retirement plans;
What information you can get about your plan;
When and how you can receive retirement benefits;
What to do if you have a question or find a mistake;
The responsibilities of those who manage the plan
and its investments;
Your responsibilities to understand and monitor your
Specific circumstances such as how a divorce or
change of employer ownership may affect your
Retirement Plans Covered In This Booklet
This booklet covers private retirement plans that are
governed by Federal laws and guidelines in the Employee
Retirement Income Security Act of 1974 (ERISA) and the
Internal Revenue Code. ERISA is a Federal statute that
sets standards for most employer and union sponsored
retirement plans in private industry and imposes
responsibilities on those running the plan. Participants
in these plans have certain rights as well as
The rules discussed in this booklet do not apply to all
retirement plans. For example, the information does not
State and local government plans, including plans
covering public school teachers and school administrators;
Most church plans; and
Plans for Federal government employees.
Also, if you are in a collectively-bargained plan, the
rules that apply under ERISA may be different in some
The information contained in this guide
answers the most common questions about retirement plans.
Keep in mind, however, that this booklet is a simplified
summary of participant rights and responsibilities, not a
legal interpretation of ERISA.
Chapter 1: Types Of Retirement Plans
The first step to understanding your retirement
benefits is to find out what kind of retirement plan your
employer has. There are two major types of plans, defined
benefit and defined contribution, which are described here
and outlined in Table 1. Keep in mind that your employer
may have more than one type of plan, and may have
different participation requirements for each.
A defined benefit plan, funded by the employer,
promises you a specific 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
often, it may calculate your benefit through a formula
that includes factors such as your salary, your age, and
the number of years you worked at the company. For
example, your pension benefit might be equal to 1 percent
of your average salary for the last 5 years of employment
times your total years of service.
A defined contribution plan, on the other hand, does
not promise you a specific benefit amount at retirement.
Instead, you and/or your employer contribute money to your
individual account in the plan. In many cases, you are
responsible for choosing how these contributions are
invested, and deciding how much to contribute from your
paycheck through pretax deductions. Your employer may add
to your account, in some cases by matching a certain
percentage of your contributions. The value of your
account depends on how much is contributed and how well
the investments perform. At retirement, you receive the
balance in your account, reflecting the contributions,
investment gains or losses, and any fees charged against
your account. The 401(k) plan is a popular type of defined
contribution plan, and there are three types of 401(k)
plans: traditional, SIMPLE 401(k), and
Safe Harbor 401(k)
plans. The SIMPLE-IRA plan, SEP,
employee stock ownership
plan (ESOP), and profit-sharing plan are other examples of
defined contribution plans. (See explanations of the
various types of plans in the Glossary at the end).
Employers can choose whether to offer a retirement
plan to employees; Federal law does not require employers
to offer or to continue to offer a plan.
The Pension Benefit Guaranty Corporation (PBGC)
guarantees payment of certain retirement benefits for
participants in most private defined benefit plans if the
plan is terminated without enough money to pay all of the
promised benefits. The government does not guarantee
benefit payments for defined contribution plans. For more
information, see the PBGC’s Web site.
Some hybrid plans – such as
cash balance plans –
contain features of both types of plans described above.
See the Glossary for information on this type of plan.
Ask your plan administrator, human resources office or
employer for information on what type of plan or plans you
have at work. You can ask for a copy of the Summary Plan
Description (the retirement plan booklet that you should
receive when you enroll in the plan) and review the
information about the plan.
1. Characteristics Of Defined Benefit And Defined Contribution Plans
Federal rules set amounts that employers must
contribute to plans in an effort to ensure that
plans have enough money to pay benefits when due.
There are penalties for failing to meet these
There is no
requirement that the employer contribute, except
in the SIMPLE 401(k) and Safe Harbor 401(k)s,
money purchase plans, SIMPLE IRA and SEP plans.
The employer may
choose to match a portion of the employee’s
contributions or to contribute without employee
contributions. In some plans, employer
contributions may be in the form of employer
employees do not contribute to these plans.
Many plans require
the employee to contribute in order for an account
to be established.
manage the investment and the employer is
responsible for ensuring that the amount it has
put in the plan plus investment earnings will be
enough to pay the promised benefit.
The employee often
is responsible for managing the investment of his
or her account, choosing from investment options
offered by the plan. In some plans, plan officials
are responsible for investing all the plan’s
Benefits Paid Upon Retirement
A promised benefit
is based on a formula in the plan, often using a
combination of the employee’s age, years worked
for the employer, and/or salary.
The benefit depends
on contributions made by the employee and/or the
employer, performance of the account’s
investments, and fees charged to the account.
Retirement Benefit Payments
these plans pay the retiree monthly annuity
payments that continue for life. Plans may offer
other payment options.
The retiree may
transfer the account balance into an individual
retirement account (IRA) from which the retiree
withdraws money, or may receive it as a lump sum
payment. Some plans also offer monthly payments
through an annuity.
government, through the Pension Benefit Guaranty
Corporation (PBGC), guarantees some amount of
guarantee of benefits.
Company Before Retirement Age
If an employee
leaves after vesting in a benefit but before the
plan’s retirement age, the benefit generally
stays with the plan until the employee files a
claim for it at retirement. Some defined benefit
plans offer early retirement options.
The employee may
transfer the account balance to an individual
retirement account (IRA) or, in some cases,
another employer plan, where it can continue to
grow based on investment earnings. The employee
also may take the balance out of the plan, but
will owe taxes and possibly penalties, thus
reducing retirement income. Plans may cash out
Chapter 2: Earning Retirement Benefits
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 plan’s 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 employer’s retirement plan?
Find out if you are within the group of employees covered by your employer’s
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
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 plan’s 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
Some 401(k) 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 401(k) 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
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 401(k) 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 PBGC’s 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
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
In a defined contribution plan such as a 401(k) 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 employer’s
matching contributions. (There are exceptions, such as the SIMPLE 401(k) and the
Safe Harbor 401(k), in which you are immediately vested in all required employer
Currently, employers have a choice of 2 different vesting schedules for
employer matching 401(k) 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).
Table 2 below shows the current
vesting schedules, as of 2002, for employer
matching 401(k) contributions, as discussed above.
Table 3 is for employees
receiving employer contributions other than
matching 401(k) 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
401(k) contributions prior to 2002).
Table 4 is for plans you left
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 401(k) 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
(Use Table in Effect on Date You Left Employer)
Table 2: Effective Date 01/01/02 - Present for 401(k) Matching
Years of Service
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
Years of Service
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
Years of Service
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
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 ---
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 plan’s 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 employer’s contributions.
Chapter 3: Plan Information To Review
If you have a question about your retirement plan, you can start by looking
for an answer in the information that the plan provides. You can request this
information from your plan administrator, the person who is in charge of running
the plan. Your employer can tell you how to contact your plan administrator.
Information Provided By The Retirement Plan
Each retirement plan is required to have a formal, written plan document that
details how it operates and its requirements. As noted previously, there is also
a booklet that describes the key plan rules, called the Summary Plan Description
(SPD), which should be much easier to read and understand. The SPD should
include a summary of any material changes to the plan or to the information
required to be in the SPD. In many cases, you can start with the SPD and then
look at the plan document if you still have questions.
In addition, plans must provide you with a number of notices. Some of the key
notices are described in Table 5.
For example, defined contribution
plans, such as 401(k) plans, generally are
required to provide advance notice to employees when a “blackout period”
occurs. A blackout period is when a participant’s right to direct investments,
take loans, or obtain distributions is suspended for a period of at least three
consecutive business days. Blackout periods can often occur when plans change
recordkeepers or investment options.
Some plan information, such as the Summary Plan Description, must be provided
to you automatically and without charge at the time periods indicated below. You
may request a Summary Plan Description at other times, but your employer might
charge you a copying fee. You must ask the plan if you want other information,
such as a copy of the written plan document or the plan’s Form 5500 annual
financial report, and you may have to pay a copying fee. See Tables 5 and 6.
Many employers provide benefit information on a Web site.
In some cases, plans provide information more frequently than required by
Federal law. For instance, many large defined contribution plans provide
quarterly benefit statements, and some plans allow participants to check their
statements online or by telephone.
The plan’s annual financial report (Form 5500) is also available (there is
a copying fee if over 100 pages) by contacting the U.S. Department of Labor,
EBSA Public Disclosure Facility, Room N-1513, 200 Constitution Avenue, NW,
Washington, D.C. 20210, Tel: 202.693.8673. In addition, if your plan
administrator does not provide you, as a participant covered under the plan,
with a copy of the Summary Plan Description automatically or after you request
it, you may contact the Department of Labor toll free at 1.866.444.EBSA (3272)
Table 5. Key information your plan administrator must provide automatically
Summary Plan Description
A summary version of the plan document and
other important plan information, in easier-to-understand language.
days of becoming a participant in the plan, and an updated copy every 10 years
(5 years if the plan has been amended).
Summary of Material Modifications
A summary of significant plan changes or
changes in the information required to be in the SPD.
Within 7 months of the end
of the plan year in which the changes were made.
Summary Annual Report
A summary of financial information filed by the plan on
its Form 5500 Annual Return/Report.
Within 9 months after the end of the plan
year or 2 months after the annual report filing deadline.
Notice of Significant Reduction in Future Benefit Accruals
Notice of any
significant reduction in the rate of future benefit accruals, the elimination,
or significant reduction in an early retirement benefit or retirement-type
subsidy. Applies to defined benefit plans and certain defined contribution
Within a reasonable time before the effective date of the plan amendment.
Notice of a period of more than 3 consecutive business days
when there is a temporary suspension, limitation or restriction on directing or
diversifying plan assets, obtaining loans, or obtaining distributions. Applies
to 401(k) or other individual account plans.
Generally, at least 30 days before
the blackout date.
Notice to Participants of Underfunded
Plan For defined benefit plans that are
less than 90% funded, the notice of the funding level of the plan and
information on PBGC guarantees.
Within 2 months after the due date for filing
the annual report.
Table 6. Key information your plan administrator must provide upon written
Individual Benefit Statement
Statements of total accrued benefits and total
vested pension benefits, and the earliest date on which nonvested benefits
Free (no more than once a year)
Documents that provide the terms of the plan, including
collective bargaining agreements and trust agreements.
Reasonable copying charge
Annual Report (Form 5500) – most recent report
Financial information about
the plan that most plans are required to file with the government within 7
months of the end of the plan year.
Reasonable copying charge
What plan information should you review regularly?
If you are in a defined benefit plan, you should request an
benefit statement once a year and review its description of the total benefits
you have earned and whether you are vested in those benefits. Also check to make
sure your date of birth, date of hire, and the other information included is
Many defined contribution plans, including 401(k) plans, send participants
individual benefit statements. If you receive a statement, check it to make sure
all of the information is accurate. This information may include:
Amounts that you and your employer have contributed
The performance of your investments (defined contribution plan participants)
Fees paid by the plan and/or charged to participants. (For more information,
see the Department of Labor brochure A Look at 401(k) Plan Fees at
www.dol.gov/ebsa or call the Department of Labor toll free at 1.866.444.EBSA
(3272).) Check with your plan to see if this information is included in
materials on your investment options, the benefit statement, the Summary Plan
Description or the plan’s annual report Form 5500. See Chapter 7 for more
information on the fees that your employer can charge to your account.
Make sure you have received the plan’s Summary Plan Description and read it
for information on how your plan works.
Read other documents you receive from your plan to make sure that you keep up
with any plan changes, and check that the information on your benefit statement
If you are in a defined contribution plan, ask for information on the
investment choices available in the plan and find out when and how you can
change your plan account investments.
If you suspect errors in your plan information, contact your plan
administrator or the human resources department.
If there have been changes in your personal information, such as marriage,
divorce or change of address, contact your plan administrator or the human
Keep your plan documents in a safe place in case questions arise in the
Chapter 4: Payment Of Benefits
Once you understand what type of plan you have, how you earn benefits, and
how much your benefits will be, it is important to learn when and how you can
When can you begin to receive retirement benefits?
There are several points to keep in mind in determining when you can receive
Federal law provides guidelines, shown in Table 7 below, for when plans
must start paying retirement benefits.
Plans can choose to start paying benefits sooner. The plan documents will
state when you may begin receiving payments from your plan.
You must file a claim for benefits for your payments to begin. This takes
some time for administrative reasons. (See Chapter 6).
Table 7: Requirements under federal law for payment of retirement benefits
Under Federal law, your plan must allow you to begin receiving
later of -
Reaching age 65 or the age your plan considers to be normal retirement age
10 years of service
Terminating your service with the employer
*For administrative reasons, benefits do not begin immediately after meeting
these conditions. At a minimum, your plan must provide that you will start
receiving benefits within 60 days after the end of the plan year in which you
satisfy the conditions. Also, you need to file a claim under your plan’s
procedures. (See Chapter 6)
Under certain circumstances, your benefit payments may be suspended if you
continue to work beyond normal retirement age. The plan must notify you of the
suspension during the first calendar month or payroll period in which payments
are withheld. This information should also be included in the Summary Plan
Description. A plan also must advise you of its procedures for requesting an
advance determination of whether a particular type of reemployment would result
in a suspension of benefit payments. If you are a retiree and are considering
taking a job, you may wish to write to your plan administrator and ask if your
benefits would be suspended.
Table 7 shows the general requirements for when payments begin. Listed below
are some permitted variations:
A phased retirement option allows employees at or near retirement age to
reduce their work hours to part time, receive benefits, and continue to earn
ESOPs do not have to pay out any benefits until one year after the plan year
in which you retire, or as many as six years if you leave for reasons other than
retirement, death, or disability.
You may owe current income taxes – and possibly tax penalties -- on your
distribution if you take money out before age 59½, unless you transfer it to an
IRA or another tax-qualified retirement plan.
Taking all or a portion of your funds out of your account before
retirement age will mean you have less in retirement benefits.
When is the latest you may begin to take payment of your benefits?
Federal law sets a mandatory date by which you must start receiving your
retirement benefits, even if you would like to wait longer. This mandatory start
date generally is set to begin on April 1 following the calendar year in which
you turn 70½ or, if later, when you retire. However, your plan may require you
to begin receiving distributions even if you have not retired by age 70½.
In what form will your benefits be paid?
If you are in a defined benefit or money purchase plan, the plan must offer
you a benefit in the form of a life annuity, which means that you will receive
equal, periodic payments, often as a monthly benefit, which will continue for
the rest of your life. Defined benefit and money purchase plans may also offer
other payment options, so check with the plan. If you are in a defined
contribution plan (other than a money purchase plan), the plan may pay your
benefits in a single lump-sum payment as well as offer other options, including
payments over a set period of time (such as 5 or 10 years) or an annuity with
monthly lifetime payments.
If you are leaving your employer before retirement age, see the next
Can a benefit continue for your spouse should you die first?
In a defined benefit or money purchase plan, unless you and your spouse
choose otherwise, the form of payment will include a survivor’s benefit. This
survivor’s benefit, called a qualified joint and survivor annuity (QJSA), will
provide payments over your lifetime and your spouse’s lifetime. The benefit
payment that your surviving spouse receives must be at least half of the benefit
payment you received during your joint lives. If you choose not to receive the
survivor’s benefit, both you and your spouse must receive a written
explanation of the QJSA and, within certain time limits, you must make a written
waiver and your spouse must sign a written consent to the alternative payment
form without a survivor’s benefit. Your spouse’s signature must be witnessed
by a notary or plan representative.
In most 401(k) plans and other defined contribution plans the plan is written
so different protections apply for surviving spouses. In general, in most
defined contribution plans if you should die before you receive your benefits,
your surviving spouse will automatically receive them. If you wish to select a
different beneficiary, your spouse must consent by signing a waiver, witnessed
by a notary or plan representative.
If you were single when you enrolled in the plan and subsequently married, it
is important that you notify your employer and/or plan administrator and change
your status under the plan. If you do not have a spouse, it is important to name
If you or your spouse left employment prior to January 1, 1985, different
rules apply. For more information on these rules, contact the Department of
Labor toll free at 1.866.444.EBSA (3272).
Can you borrow from your 401(k) plan account?
401(k) plans are permitted to – but not required to – offer loans to
participants. The loans must charge a reasonable rate of interest and be
adequately secured. The plan must include a procedure for applying for the loans
and the plan’s policy for granting them. Loan amounts are limited to the
lesser of 50% of your account balance or $50,000 and must be repaid within 5
years, or 15 years for residential loans.
Can you get a distribution from your plan if you are not yet 65 or your plan’s
normal retirement age but are facing a significant financial hardship?
Again, defined contribution plans are permitted to – but not required to
– provide distributions in case of hardship. Check your plan booklet to see if
it does permit them and what circumstances are included as hardships.
Find out when and in what form you can receive your benefits at retirement.
Fill out the necessary forms to update information with your retirement plan.
Notify the retirement plan of any change of address or marital status.
Keep all documents for your records, including Summary Plan Descriptions,
company memos, and individual benefit statements.
For tax information, look at
Internal Revenue Service Publication 575
(Pension and Annuity Income) by visiting www.irs.gov and selecting “Publications”.
Chapter 5: Taking Your Retirement Benefit With You
If you leave an employer before you reach retirement age, whether or not you
can take your benefits out and/or roll them into another tax-qualified plan or
account will depend on what type of plan you are in.
If you leave before retirement, can you take your retirement benefit with
If you are in a defined benefit plan (other than a
most likely will be required to leave the benefits with the retirement plan
until you become eligible to receive them. As a result, it is very important
that you update your personal information with the plan administrator regularly
and keep current on any changes in your former employer’s ownership or
If you are in a cash balance plan, you probably will have the option of
transferring at least a portion of your account balance to an individual
retirement account or to a new employer’s plan.
If you leave your employer before retirement age and you are in a
contribution plan (such as a 401(k) plan), in most cases you will be able to
transfer your account balance out of your employer’s plan.
What choices do you have for taking your defined contribution benefits?
A lump sum – you can choose to receive your benefits as a single payment
from your plan, effectively cashing out your account. You may need to pay income
taxes on the amount you receive, and possibly a penalty.
A rollover to another retirement plan – you can ask your employer to
transfer your account balance directly to your new employer’s plan if it
accepts such transfers.
A rollover to an IRA – you can ask your employer to transfer your account
balance directly to an individual retirement account (IRA).
If your account balance is less than $5,000 when you leave the employer, the
plan can make an immediate distribution without your consent. If this
distribution is more than $1,000, the plan must automatically roll the funds
into an IRA it selects, unless you elect to receive a lump sum payment or to
roll it over into an IRA you choose. The plan must first send you a notice
allowing you to make other arrangements, and it must follow rules regarding what
type of IRA can be used (i.e. it cannot combine the distribution with savings
you have deposited directly in an IRA). Rollovers must be made to an entity that
is qualified to offer individual retirement plans. Also, the rollover IRA must
have investments designed to preserve principal. The IRA provider may not charge
more in fees and expenses for such plans than it would to its other individual
retirement plan customers.
Please note: If you elect a lump sum payment and do not transfer the money to
another retirement account (employer plan or IRA other than a Roth IRA), you
will owe a tax penalty if you are under age 59½ and do not meet certain
exceptions. In addition, you may have less to live on during your retirement.
Transferring your retirement plan account balance to another plan or an IRA when
you leave your job will protect the tax advantages of your account and preserve
the benefits for retirement.
What happens if you leave a job and later return?
If you leave an employer for whom you have worked for several years and later
return, you may be able to count those earlier years toward vesting. Generally,
a plan must preserve the service credit you have accumulated if you leave your
employer and then return within five years. Service credit refers to the years
of service that count towards vesting. 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
If you retire and later go back to work for a former employer, you must be
allowed to continue to accrue additional benefits, subject to a plan limit on
the total years of service credited under the plan.
If you are leaving an employer before retirement, find out whether you can
roll your benefits into a new plan or into an IRA.
If you are leaving your benefits in your former employer’s plan, be sure to
keep your contact information up to date with the former employer, and keep
track of the employer’s contact information.
If you are considering taking your benefits out as a lump sum, find out what
taxes and penalties you will owe, and make a plan on how you will replace that
income in retirement.
Chapter 6: Filing A Claim For Benefits
Federal retirement law requires all plans to have a reasonable written
procedure for processing your benefits claim and appeal if your claim is denied.
The Summary Plan Description (SPD) should include your plan’s claims
procedures. Usually, you fill out the required paperwork and submit it to the
plan administrator, who then can tell you what your benefits will be and when
they will start.
Filing A Claim And Filing An Appeal
If there is a problem or a dispute about whether you qualify for benefits or
what amount you should receive, check your plan’s claims procedure. Federal
law outlines the following claims procedures requirements:
Once your claim is filed, the plan can take up to 90 days to reach a
decision, or 180 days if it notifies you that it needs an extension.
If your claim is denied, you must receive a written notice, including
specific information about why your claim was denied and how to file an appeal.
You have 60 days to request a full and fair review of your denied claim,
using your plan's appeals procedure.
The plan can take up to 60 days to review your appeal, as well as an
additional 60 days if it notifies you of the need for an extension. The plan
must then send a written notice telling you whether the appeal was granted or
If the appeal is denied, the written notice must tell you the reason,
describe any additional appeal levels, and give you a statement regarding your
rights to seek judicial review of the plan’s decision.
If you believe the plan failed to follow ERISA’s requirements, you may
decide to seek legal advice if the plan denies your appeal. You also can contact
the Department of Labor concerning your rights under ERISA by calling toll free
at 1.866.444.EBSA (3272).
For more information on claims procedures, see the Department of Labor
publication, Filing a Claim for Your Retirement Benefits at www.dol.gov/ebsa
or call toll free at 1.866.444.EBSA (3272).
Contact your plan administrator to get the paperwork that you need to file a
claim to start receiving retirement benefits.
Contact the Department of Labor (EBSA) by calling toll
free at 1.866.444.EBSA
(3272) if you have questions about your plan or your rights under ERISA.
Chapter 7: Responsibilities Of Plan Fiduciaries
In every retirement plan, there are individuals or groups of people who use
their own judgment or discretion in administering and managing the plan or who
have the power to or actually control the plan’s assets. These individuals or
groups are called plan fiduciaries. Fiduciary status is based on the functions
that the person performs for the plan, not just the person’s title.
Does your plan have to identify those responsible for operating the plan?
A plan must name at least one fiduciary in the written plan document, or
through a process described in the plan, as having control over the plan’s
operations. This fiduciary can be identified by office or by name. For some
plans, it may be an administrative committee or the company’s board of
directors. Usually, a plan’s fiduciaries will include the trustee, investment
managers, and the plan administrator. The plan administrator is usually the best
starting point for questions you might have about the plan.
What are the responsibilities of plan fiduciaries?
Fiduciaries have important responsibilities and are subject to certain
standards of conduct because they act on behalf of the participants in the plan.
These responsibilities include:
Acting solely in the interest of plan participants and their beneficiaries,
with the exclusive purpose of providing benefits to them;
Carrying out their duties with skill, prudence, and diligence;
Paying only reasonable expenses of administering the plan and investing its
Avoiding conflicts of interest.
The fiduciary also is responsible for selecting the investment providers and
the investment options, and for monitoring their performance. Some plans, such
as most 401(k) or profit sharing plans, can be set up to permit participants to
choose the investments in their accounts (within certain investment options
provided by the plan). If the plan is properly set up to give participants
control over their investments, then the fiduciary is not liable for losses
resulting from the participant’s investment decisions. Department of Labor
rules provide guidance designed to make sure participants have sufficient
information on the specifics of their investment options so they can make
informed decisions. This information includes:
A description of each investment option, including the investment goals,
risk, and return characteristics;
Information about any designated investment managers;
An explanation of when and how to request changes in investments, plus any
restrictions on when you can change investments;
A statement of the fees that may be charged to your account when you change
investment options or buy and sell investments; and
The name, address, and telephone number of the plan fiduciary or other person
designated to provide certain additional information on request.
A statement that the plan is intended to follow the Department of Labor rules
and that the fiduciaries may be relieved of liability for losses that are the
direct and necessary result of a participant’s investment instructions also
must be included.
What if a plan fiduciary fails to carry out its responsibilities?
Fiduciaries that do not follow the required standards of conduct may be
personally liable. If the plan lost money because of a breach of their duties,
fiduciaries would have to restore those losses, or any profits received through
their improper actions. For example, if an employer did not forward participants’
401(k) contributions to the plan, they will have to pay back the contributions
to the plan as well as any lost earnings, and return any profits they improperly
received. Fiduciaries also can be removed from their positions as fiduciaries if
they fail to follow the standards of conduct.
When does the employer need to deposit employee contributions in the plan?
If you contribute to your retirement plan through deductions from your
paycheck, then the employer must follow certain rules to make sure that it
deposits the contributions in a timely manner. The law says that the employer
must deposit participant contributions as soon as it is reasonably possible to
separate them from the company’s assets, but no later than the 15th business
day of the month following the payday. In the Annual Report (Form 5500), the
plan administrator is required to include information on whether deposits of
contributions were made on a timely basis. For more information, see the
Department of Labor’s Ten Warnings Signs That Your 401(k) Contributions Are
Being Misused at www.dol.gov/ebsa for indicators of possible delays in
What are the plan fiduciaries’ obligations regarding the fees and expenses
paid by the plan? Can the plan charge my defined contribution plan account for
Plan fiduciaries have a specific obligation to consider the fees and expenses
paid by your plan for its operations. ERISA’s fiduciary standards, discussed
above, mean that fiduciaries must establish a prudent process for selecting
investment alternatives and service providers to the plan; ensure that fees paid
to service providers and other expenses of the plan are reasonable in light of
the level and quality of services provided; select investment alternatives that
are prudent and adequately diversified; and monitor investment alternatives and
service providers once selected to see that they continue to be appropriate
The plan may deduct fees from your defined contribution plan account. Plan
administration fees and investment fees can be deducted from your account either
as a direct charge or indirectly as a reduction of your account’s investment
returns. Fees for individual services, such as for processing a loan from the
plan or a Qualified Domestic Relations Order, also may be charged to your
For more information, see the Department of Labor brochure A Look at
401(k) Plan Fees at www.dol.gov/ebsa or call the Department of Labor toll
free at 1.866.444.EBSA (3272).
If you have any questions about the management of the plan and its assets,
contact your plan administrator.
Chapter 8: Your Benefit During A Plan Termination Or Company Merger
As noted at the beginning of this booklet, employers are not required to
offer a retirement plan and plans can be modified and/or terminated.
What happens when a plan is terminated?
Federal law provides some measures to protect employees who participated in
plans that are terminated, both defined benefit and
defined contribution. When a
plan is terminated, the current employees must become 100 percent vested in
their accrued benefits. This means you have a right to all the benefits that you
have earned at the time of the plan termination, even benefits in which you were
not vested and would have lost if you had left the employer. If there is a
partial termination of a plan, for example, if your employer closes a particular
plant or division that results in the end of employment of a substantial
percentage of plan participants, the affected employees must be immediately 100
percent vested to the extent the plan is funded.
What if your terminated defined benefit plan does not have enough money to
pay the benefits?
The Federal government, through the Pension Benefit Guaranty Corporation (PBGC),
insures most private defined benefit plans. For terminated defined benefit plans
with insufficient money to pay all of the benefits, the PBGC will guarantee the
payment of your vested pension benefits up to the limits set by law. For further
information on plan termination guarantees, contact the Pension Benefit Guaranty
Corporation toll free at 1.800.400.7242, or visit the Web site.
What happens if a defined contribution plan is terminated?
The PBGC does not guarantee benefits for defined contribution plans. If you
are in a defined contribution plan that is in the process of terminating, the
plan fiduciaries and trustees should take actions to maintain the plan until
they terminate it and pay out the assets.
Is your accrued benefit protected if your plan merges with another plan?
Your plan rules and investment choices are likely to change if your company
merges with another. Your employer may choose to merge your plan with another
plan. If your plan is terminated as a result of the merger, the benefits that
you have accrued cannot be reduced. You must receive a benefit that is at least
equal to the benefit you were entitled to before the merger. In a defined
contribution plan, the value of your account may still fluctuate after the
merger based on the
performance of the investments.
What if your employer goes bankrupt?
Generally, your retirement assets should not be at risk if your employer
declares bankruptcy . Federal law requires that retirement plans fund promised
benefits adequately and keep plan assets separate from the employer’s business
assets. The funds must be held in trust or invested in an insurance contract.
The employers’ creditors cannot make a claim on retirement plan funds.
However, it is a good idea to confirm that any contributions your employer
deducts from your paycheck are forwarded to the plan’s trust or insurance
contract in a timely manner.
Significant business events such as bankruptcies, mergers, and acquisitions
can result in employers abandoning their individual account plans (e.g.,
leaving no plan fiduciary to manage it. In this situation, participants often
have great difficulty in accessing the benefits they have earned and have no one
to contact with questions. Custodians such as banks, insurers, and mutual fund
companies are left holding the assets of these plans but do not have the
authority to terminate the plans and distribute the assets. In response, the
Department of Labor issued rules to create a voluntary process for the custodian
to wind up the plan’s business so that benefit distributions can be made and
the plan terminated. Information about this program can be found on the
Department’s Web site at www.dol.gov/ebsa.
If your former employer has gone out of business, arrangements should have
been made so a plan official remains responsible for the payment of benefits and
other plan business.
If you are entitled to benefits and are unable to contact
the plan administrator, contact EBSA by calling toll free at 1.866.444.EBSA (3272)
or by visiting the Web site at http://askebsa.dol.gov/.
Keep a file with information on your plan and company. If the company no
longer exists under its former name, you might find some information on the
Internet by entering the former name in a search engine. If your plan is
abandoned, use the search function on the EBSA Web site, at www.dol.gov/ebsa, to
find out if the plan’s custodian is terminating the plan and the custodian’s
If your plan merges, make sure you read the communications about changes in
your plan, including changes in benefits and investment choices.
If your retirement benefit remains with a former employer, keep current on
any changes your former employer makes, including changes of address, mergers,
or employer name.
If you move, give the plan your new contact information.
Chapter 9: Potential Claims Against Your Benefit (Divorce)
In general, your retirement plan is safe from claims by other people.
Creditors to whom you owe money cannot make a claim against funds that you have
in a retirement plan. For example, if you leave your employer and transfer your
401(k) account into an individual retirement account (IRA), creditors generally
cannot get access to those IRA funds even if you declare bankruptcy.
Federal law does make an exception for family support and the division of
property at divorce. A state court can award part or all of a participant's
retirement benefit to the spouse, former spouse, child, or other dependent. The
recipient named in the order is called the alternate payee. The court issues a
specific court order, called a domestic relations order, which can be in the
form of a state court judgment, decree or order, or court approval of a property
settlement agreement. The order must relate to child support, alimony, or
marital property rights, and must be made under state domestic relations law.
The plan administrator determines if the order is a qualified domestic relations
order (QDRO) under the plan’s procedures and then notifies the participant and
the alternate payee. If the participant is still employed, a QDRO can require
payment to the alternate payee to begin on or after the participant’s earliest
possible retirement age available under the plan. These rules apply to both
defined benefit and defined contribution plans. For additional information,
EBSA’s publication, QDROs – The Division of Pensions Through Qualified
Domestic Relations Orders, available by calling toll free at 1.866.444.EBSA
(3272) or on the Web site at www.dol.gov/ebsa.
If you are involved in a divorce, you should discuss these issues with your
plan administrator and your attorney.
Chapter 10: What To Do If You Have A Problem
Sometimes, retirement plan administrators, managers, and others involved with
the plan make mistakes. Some examples include:
Your 401(k) or individual account statement is consistently late or comes at
Your account balance does not appear to be accurate;
Your employer fails to transmit your contribution to the plan on a timely
It is important for you to know that you can follow up on any possible
mistakes without fear of retribution. Employers are prohibited by law from
firing or disciplining employees to avoid paying a benefit, as a reprisal for
exercising any of the rights provided under a plan or Federal retirement law (ERISA),
or for giving information or testimony in any inquiry or proceeding related to
Start With Your Employer And/Or Plan Administrator
If you find an error or have a question, in most cases, you can start by
looking for information in your Summary Plan Description. In addition, you can
contact your employer and/or the plan administrator and ask them to explain what
has happened and/or make a correction.
Is it possible to sue under ERISA?
Yes, you have a right to sue your plan and its fiduciaries to enforce or
clarify your rights under ERISA and your plan in the following situations:
To appeal a denied claim for benefits after exhausting your plan's claims
To recover benefits due you;
To clarify your right to future benefits;
To obtain plan documents that you previously requested in writing but did not
To address a breach of a plan fiduciary's duties; or
To stop the plan from continuing any act or practice that violates the terms
of the plan or ERISA.
What is the role of the Labor Department?
The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA)
is the agency responsible for enforcing the provisions of ERISA that govern the
conduct of plan fiduciaries, the investment and protection of plan assets, the
reporting and disclosure of plan information, and participants’ benefit rights
However, not all retirement plans are covered by ERISA. For example, Federal,
state, or local government plans and some church plans are not covered.
The Department of Labor enforces the law by informally resolving benefit
disputes, conducting investigations, and seeking correction of violations of the
law, including bringing lawsuits when necessary.
The Department has benefits advisors committed to providing individual
assistance to participants and beneficiaries. Participants will receive
information on their rights and responsibilities under the law and help in
obtaining benefits to which they are entitled.
Contact a benefits advisor by calling toll free at 1.866.444.EBSA (3272) or
electronically at http://askebsa.dol.gov.
Contact the Department of Labor’s EBSA for questions about ERISA, help
obtaining a benefit, or:
If you believe your claim to benefits has been unjustly denied or that your
benefit was calculated incorrectly;
If you have information that plan assets are being mismanaged or misused;
If you think the plan fiduciaries are acting improperly; or
If you think your employer has been late in depositing your contributions
(see Chapter 7).
What Other Federal Agencies Can Assist Participants And Beneficiaries?
The Pension Benefit Guaranty Corporation (PBGC) is a federally created
corporation that guarantees payment of certain pension benefits under most
private defined benefit plans when they are terminated with insufficient money
to pay benefits.
The Treasury Department's Internal Revenue Service is responsible for the
rules that allow tax benefits for both employees and employers related to
retirement plans, including vesting and distribution requirements. The IRS
maintains a taxpayer assistance line for retirement plans at: 1.877.829.5500
(toll-free number). The call center is open Monday through Friday.
401(k) Plan – In this type of defined contribution plan, the employee can
make contributions from his or her paycheck before taxes are taken out. The
contributions go into a 401(k) account, with the employee often choosing the
investments based on options provided under the plan. In some plans, the
employer also makes contributions, matching the employee’s contributions up to
a certain percentage. SIMPLE and Safe Harbor 401(k) plans have additional
employer contribution and vesting requirements.
Cash Balance Plan – A type of defined benefit plan that includes some
elements that are similar to a defined contribution plan because the benefit
amount is computed based on a formula using contribution and earning credits,
and each participant has a hypothetical account. Cash balance plans are more
likely than traditional defined benefit plans to make lump sum distributions.
(For more information, see Frequently Asked Questions about Cash Balance
Pension Plans on the Department of Labor’s Web site, at www.dol.gov/ebsa/faqs/.)
Defined Benefit Plan – This type of plan, also known as the traditional
pension plan, promises the participant a specified monthly benefit at
retirement. Often, the benefit is based on factors such as your salary, your
age, and the number of years you worked for the employer.
Defined Contribution Plan – In a defined contribution plan, the employee
and/or the employer contribute to the employee’s individual account under the
plan. The employee often decides how their accounts are invested. The amount in
the account at distribution includes the contributions and investment gains or
losses, minus any investment and administrative fees. The contributions and
earnings are not taxed until distribution. The value of the account will change
based on the value and performance of the investments.
Employee Retirement Income Security Act of 1974
A Federal law that
sets standards of protection for individuals in most voluntarily established,
private-sector retirement plans. ERISA requires plans to provide participants
with plan information, including important facts about plan features and
funding; sets minimum standards for participation, vesting, benefit accrual, and
funding; provides fiduciary responsibilities for those who manage and control
plan assets; requires plans to establish a claims and appeals process for
participants to get benefits from their plans; gives participants the right to
sue for benefits and breaches of fiduciary duty; and, if a defined benefit plan
is terminated, guarantees payment of certain benefits through a federally
chartered corporation, known as the Pension Benefit Guaranty Corporation (PBGC).
Individual Benefit Statement – An individual benefit statement provides
information about a participant’s retirement benefits, such as the total plan
benefits earned and vested benefits, on a periodic basis. Additional information
may be included depending upon the type of plan, such as how a 401(k) plan
account is invested.
Individual Retirement Account (IRA) – An individual account set up with a
financial institution, such as a bank or a mutual fund company. Under Federal
law, individuals may set aside personal savings up to a certain amount, and the
investments grow, tax deferred. In addition, defined contribution plan
participants can transfer money from an employer retirement plan to an IRA when
leaving an employer. IRAs also can be part of an employer plan.
Money Purchase Plan – A money purchase plan requires set annual
contributions from the employer to individual accounts and is subject to other
Multiemployer Plan – A retirement plan sponsored by several employers under
collective bargaining agreements that meets certain other requirements. A
participant who changes jobs from one sponsoring employer to another stays
within the same plan.
Plan Administrator – The person who is identified in the plan document as
having responsibility for running the plan. It could be the employer, a
committee of employees, a company executive, or someone hired for that purpose.
Plan Document – A written instrument under which the plan is established
Plan Fiduciary – Anyone who exercises discretionary authority or
discretionary control over management or administration of the plan, exercises
any authority or control over management or disposition of plan assets, or gives
investment advice for a fee or other compensation with respect to assets of the
Plan Trustee – Someone who has the exclusive authority and discretion to
manage and control the assets of the plan. The trustee can be subject to the
direction of a named fiduciary and the named fiduciary can appoint one or more
investment managers for the plan’s assets.
Plan Year – A 12-month period designated by a retirement plan for
calculating vesting and distribution, among other things. The plan year can be
the calendar year or an alternative period, e.g., July 1 to June 30.
Profit-Sharing Plan – A profit-sharing plan allows the employer each year
to determine how much to contribute to the plan (out of profits or otherwise) in
cash or employer stock. The plan contains a formula for allocating the annual
contribution among the participants.
Rollover – A rollover occurs when a participant leaves an employer and
directs the defined contribution plan to transfer the money in his account to a
new plan or individual retirement account. This preserves the benefits and does
not trigger any tax consequences if done in a timely manner .
Safe Harbor 401(k) – A safe harbor 401(k) is similar to a traditional
401(k) plan, but the employer is required to make contributions for each
employee. The employer contributions in Safe Harbor 401(k) plans are immediately
100 percent vested. The Safe Harbor 401(k) eases administrative burdens on
employers by eliminating some of the complex tax rules ordinarily applied to
traditional 401(k) plans.
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – A
plan in which a small business with 100 or fewer employees can offer retirement
benefits through employee salary reductions and matching contributions (similar
to those found in a 401(k) plan). It can be either a SIMPLE IRA or a SIMPLE
401(k). SIMPLE IRA plans impose few administrative burdens on employers because
IRAs are owned by the employees and the bank or financial institution receiving
the funds does most of the paperwork. While each has some different features,
including contribution limits and the availability of loans, required employer
contributions are immediately 100 percent vested in both.
Simplified Employee Pension Plan (SEP) – A plan in which the employer makes
contributions on a tax-favored basis to individual retirement accounts (IRAs)
owned by the employees. If certain conditions are met, the employer is not
subject to the reporting and disclosure requirements of most retirement plans.
Under a SEP, an IRA is set up by or for an employee to accept the employer’s
Summary Plan Description – A document provided by the plan administrator
that includes a plain language description of important features of the plan,
e.g., when employees begin to participate in the plan, how service and benefits
are calculated, when benefits become vested, when payment is received and in
what form, and how to file a claim for benefits. Participants must be informed
of material changes either through a revised Summary Plan Description or in a
separate document called a Summary of Material Modifications.
Vested Benefits – Those benefits that the individual has earned a right to
receive and that cannot be forfeited.
Years of Service – The time an individual has worked in a job covered by
the plan. It is used to determine when an individual can participate and vest
and how they can accrue benefits in the plan.