The first step to understanding your retirement benefits is to understand your employer’s plan. There are two major types: defined benefit and defined contribution.
A defined benefit plan promises a specified payment amount at retirement. This may be stated as an exact dollar amount or may be calculated through a formula that includes factors such as your salary, age and time with the company.
In a defined contribution plan, you and/or your employer contribute to an account. Your contributions are invested and the value of your account upon retirement depends on the amount contributed and how your investments perform.
|
DEFINED
BENEFIT PLAN
|
DEFINED
CONTRIBUTION PLAN
|
Employer
Contributions and/or Matching Contributions
|
Employer
funded. Federal rules set amounts that employers must contribute to plans.
There are penalties for failing to meet these requirements.
|
For
most plans, there is no requirement that the employer contribute. The
employer may match a portion of the employee’s contributions or contribute
without employee contributions.
|
Employee
Contributions
|
Generally,
employees do not contribute to these plans.
|
Many
plans require the employee to contribute.
|
Managing
the Investment
|
Plan
sponsor manages the investment and is responsible for ensuring contributions
plus investment earnings will equal 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.
|
Amount
of Benefits Paid Upon Retirement
|
A
promised benefit is based on a formula in the plan, often using the
employee’s age, years worked for the employer and/or salary.
|
The
benefit depends on contributions made by the employee and the employer,
performance of the account’s investments and fees charged to the account.
|
Type
of Retirement Benefit Payments
|
Traditionally,
these plans pay monthly annuity payments that continue for life. Plans may
offer other payment options.
|
The
retiree may transfer the balance into an individual retirement account (IRA)
or may receive it as a lump sum. Some plans offer payments through an
annuity.
|
Guarantee
of Benefits
|
The
Federal government guarantees some amount of benefits.
|
No
Federal guarantee of benefits.
|
Leaving
the 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
retires.
|
The
employee may transfer the account balance to an IRA or, in some cases,
another employer plan. The employee also may take the balance out of the
plan, but will owe taxes and possibly penalties.
|
If you have any questions about
retirement plan services, or would like to begin talking to a retirement plan advisor, please get in touch by
email or by calling (800) 388-1963.
