Q: Is my employer required to offer a pension plan?
A: No. Many employers want to offer pension plans, not because of the law but because it helps them to recruit and keep good workers, or because a union has won a pension plan in negotiations. However, once an employer does offer a pension plan, several federal laws (passed in 1974 and since) set guidelines for how the plan must operate.
Q: Are all pension plans more or less the same?
A: No. But there are two broad categories of plans, and within each category there are important common features. In a defined-benefit plan, once you qualify for a benefit, the amount of your benefit is determined by a set of factors such as your years of service, your salary, and your age at retirement. The employer is responsible for funding the plan to cover the promised benefits and — for most private plans at least — the federal Pension Benefit Guaranty Corporation guarantees the benefits. In a defined-contribution plan, the plan sets what the employer and/or you contribute to the plan, but makes no guarantee as to what benefits you will receive. Benefits are determined by the money contributed, and its growth, if any. Profit-sharing plans and 401(k) plans are examples of this kind of pension plan. They offer greater opportunities, and greater risks. Within each of these categories, there’s room for great diversity in provisions.
Q: Which type of plan is more common?
A: Defined-benefit plans used to be much more common, but now the defined-contribution plans have become more popular with employers. From the employer’s point of view, they involve fewer risks, and less federal regulation.
Q: What are the principal types of rights that I have?
A: Speaking very generally, you have the right to: specific information about the plan, including a Summary Plan Description, which informs you of the terms of the plan; to be paid the benefits in which you vest; and honest administration of the plan.
Q: What determines my rights?
A: The immediate source of your rights is the plan document that contains the rules for your particular pension plan. If you have already left the company, your pension rights are determined by the rules in effect when you left; changes since then don’t apply to you. An equally important source of your rights is the federal laws that specify what kinds of provisions must be included in the plan documents.
Q: How can I find out the rules that apply to me?
A: Every pension plan should have a Summary Plan Description (SPD) that states the rules in plain language. It is supposed to be furnished to every worker at the time he or she joins the plan. If you don’t have a copy of the current SPD, you can request one from the plan administrator of your pension plan.
Q: How can I find out what benefits I can expect?
A: Many plans automatically provide a yearly statement that tells you two things: the benefits you have accrued up to now that is, the benefits that you would be entitled to even if you retired tomorrow and the benefits you can expect if you retire at whatever standard age is specified in your employers plan. The Pension Protection Act of 2006 requires that plans provide benefit statements to plan participants.
Q: What is vesting?
A: Vesting is a guarantee that you will receive the benefits you have earned, regardless of whether you are still working for that particular employer at the time you retire. Pension plans specify a certain amount of time (usually five years, under current federal law) needed before you become vested.
Q: If I’m not vested at the time I leave the company, does that mean I don’t get anything, even the pension money that’s been withheld from my pay?
A: No. You’re always entitled to the money that you yourself contributed to the plan. If you’re not vested, however, you won’t be entitled to the benefits your employer provides.
Q: How long must I work for an employer before I become vested?
A: That depends on the plan and on the vesting requirement that was in place when you left employment. For private plans, federal law provides a minimum vesting requirement, and that requirement has changed. Before 1976, periods of 20 years or more were common, and a plan could even require that you keep working for the company until you retired. From the mid-1970s to the mid-1980s, a vesting period of ten years was most common; since the mid-1980s, it has been five years. However, union plans have just recently been required to reduce vesting requirements to five years. Your Summary Plan Description will explain the plan’s vesting requirement.
Q: How can I find out if my pension plan is being administered honestly and competently?
A: The Employee Benefits Security Administration of the U.S. Department of Labor is responsible for ensuring that plan administrators operate the plan solely for the benefits of its participants. If you have concerns about your plan, you should contact them at www.askebsa.dol.gov or write them at The U.S. Department of Labor, Employee Benefits Security Administration, 200 Constitution Ave., NW, Room N5625, Washington, DC 20210.
Q: Do widows (and widowers) have any protection if the spouse who earned the pension dies?
A: The Retirement Equity Act of 1984 has a provision covering the “joint and survivor” option, which most plans are required to offer. Under this option, the benefits paid to a married worker will be somewhat smaller during his or her lifetime, but will continue after death if the spouse is still living. Under the REA, this option must be chosen unless a waiver form is signed by the spouse.
Q: What happens to a worker’s pension in a divorce?
A: The REA authorizes courts to treat a pension as one of the assets that can be divided during a divorce settlement, but it doesn’t require courts to do so. Note: The Women’s Institute for a Secure Retirement (WISER) is an excellent source of information on pension issues that especially involve women.