We’re starting another series this week, The Pension Advice Series. As was the case for many readers who had questions we’ll answer with the Debt Management Solutions Series, there are almost as many who are looking at the asset side of the balance sheet. While we started off with the basics and How to Use Credit Cards Effectively when managing debts, today we shall address Employer’s Pension Plan and What You Need to Know about them.
Types of Employer Pension Plans: Defined Benefit
If you are one the fortunate folks who still has a pension plan provided by your employer, you may know something your plan, or not! In general, there are two types of plans: defined benefit and defined contribution plans. If you know what your retirement income will be at the end of your career, chances are you have a defined benefit plan. An example of the calculations for your annual pension upon retirement is: 2% of your annual salary, $50000 X the number of years worked, say 30 = $30000. So as long as you know how long you will work, you’ll know what your income is during retirement. In the good old days, many people had defined benefit plans. Nowadays, it’s mostly limited to employees with grandfathered plans and government employees (wonder why government expenses continue to climb out of control?)!
Defined Contribution Plans
For the rest of us lucky enough to have a pension plan at all, it is likely to be a defined contribution plan. How they work is the contribution is a percentage of your regular paycheck. For some plans, it is only the employer who contributes, for others the employee can add to the plan as well. As the participant in the plan you may have the ability to increase the employer’s contribution by adding some of your salary. While the regular contributions are known, defined, the income generated at retirement are dependent on the returns generated within the plan. Perhaps you have a say on how they are managed, maybe not ;-(.
Group Retirement Savings Plans
Another type of defined contribution plan, while not a pension plan, is a group retirement savings plan. While sponsored and usually funded in part by the employer, the plan is administered by a financial institution and is much less expensive for the employer, has less regulation and may afford the participant (employee) more flexibility.
No Matter the Plan, What You Need to Know
You should take the time required, maybe 5-10 minutes of reading, maybe several phone calls, a few clicks on a web site to understand the details of your plan. Do you know how to calculate your income at retirement, if so it’s a defined benefit plan. Can you add to your employer’s contribution, if you participate, will they add more to the plan? Are there fees in the plan? Do you choose the investments within the plan? Do you have access to an advisor who can help you manage the plan? What happens to the plan if you leave your employer? How long before you are considered vested? When can you retire and start withdrawing from the plan without penalty?
As you can see, there are many questions to be answered. Feel free to consult an independent financial planner to make heads and tails of the information you received from the plan administrator.
Do you have a pension plan? Has this article helped steer you in the right direction? Let us know what questions you have, we would be glad to help.