A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Retirement plans in the U.S. are defined in tax terms by the IRS code and are regulated by the Department of Labor's ERISA provisions.
Types of retirement plans
Retirement plans are classified as defined benefit or defined contribution according to how benefits are determined. A defined benefit (or pension) plan calculates benefits using a fixed formula that typically factors in final pay and service with an employer, and payments are made from a trust fund specifically dedicated to the plan. In a defined contribution plan, the payout is dependent upon both the amount of money contributed into an individual account and the performance of the investment vehicles utilized.
Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution schemes.
Defined contribution plans
According to the Internal Revenue Code Section 414, a defined contribution plan is an employer-sponsored plan with an individual account for each participant. The accrued benefit from such a plan is solely attributable to contributions made into an individual account and investment gains on those funds, less any losses and expense charges. The contributions are invested ( e.g. , in the stock market), and the returns on the investment are credited to or deducted from the individual's account. Upon retirement, the participant's account is used to provide retirement benefits, often through the purchase of an annuity. Defined contribution plans have become more widespread over recent years and are now the dominant form of plan in the private sector. The number of defined benefit plans in the US has been steadily declining, as more employers see pension funding as a financial risk they can avoid by freezing the plan and instead offering a defined contribution plan.
Examples of defined contribution plans include Individual Retirement Account (IRA), 401(k), and profit sharing plans. In such plans, the participant is responsible for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks or other securities. Most self-directed retirement plans are characterized by certain tax advantages. The funds in such plans may not be withdrawn without penalty until the investor reaches retirement age, which is typically 59.5 years of age.
Money contributed can be from employee salary deferrals, employer contributions, or employer matching contributions. Defined contribution plans are subject to IRS section 415 limits on how much can be contributed. As of 2009, the total deferral amount including the employee and employer contribution is the lesser of $49,000 or 100% of compensation. The employee-only amount is $16,500 for 2009, but a plan can permit participants who are age 50 or older to make "catch-up" contributions of up to an additional $5,500.
Defined benefit plans
Commonly referred to as a pension in the US, a defined benefit plan pays benefits from a trust fund using a specific formula set forth by the plan sponsor. In other words, the plan defines a benefit that will be paid upon retirement. The statutory definition of defined benefit encompasses all pension plans that are not defined contribution and therefore do not have individual accounts.
While this catch-all definition has been interpreted by the courts to capture some hybrid pension plans like cash balance (CB) plans and pension equity plans (PEP), most pension plans offered by large businesses or government agencies are final average pay (FAP) plans, under which the monthly benefit is equal to the number of years worked multiplied by the member's salary at retirement multiplied by a factor known as the accrual rate . At a minimum, benefits are payable in normal form as a Single Life Annuity (SLA) for single participants or as a Qualified Joint and Survivor Annuity (QJSA) for married participants. Both normal forms are paid at Normal Retirement Age (usually 65) and may be actuarially adjusted for early or late commencement. Other optional forms of payment, such as lump sum distributions, may be available but are not required.
The cash balance plan typically offers a lump sum at and often before normal retirement age. However, as is the case with all defined benefit plans, a cash balance plan must also provide the option of receiving the benefit as a life annuity. The amount of the annuity benefit must be definitely determinable as per IRS regulation 1.412-1.
Defined benefit plans may be either funded or unfunded . In a funded plan, contributions from the employer and participants are invested into a trust fund dedicated solely to paying benefits to retirees under a given plan. The future returns on the investments and the future benefits to be paid are not known in advance, so there is no guarantee that a given level of contributions will meet future obligations. Therefore, fund assets and liabilities are regularly reviewed by an actuary in a process known as valuation. A defined benefit plan is required to maintain adequate funding if it is to remain qualified.
In an unfunded plan, no funds are set aside for the specific purpose of paying benefits. The benefits to be paid are met immediately by contributions to the plan or by general assets. Most government-run retirement plans, including Social Security, are unfunded, with benefits being paid directly out of current taxes and Social Security contributions. Most nonqualified plans are also unfunded.
Hybrid and Cash Balance Plans
Hybrid plan designs combine the features of defined benefit and defined contribution plan designs. In general, they are treated as defined benefit plans for tax, accounting, and regulatory purposes. As with defined benefit plans, investment risk is largely borne by the plan sponsor. As with defined contribution designs, plan benefits are expressed in the terms of a notional account balance , and are usually paid as cash balances upon termination of employment. These features make them more portable than traditional defined benefit plans and perhaps more attractive to a highly mobile workforce. A typical hybrid design is the Cash Balance Plan, where the employee's notional account balance grows by some defined rate of interest and annual employer contribution.
In the US, conversions from traditional to hybrid plan designs have been controversial. Upon conversion, plan sponsors are required to retrospectively calculate employee account balances, and if the employee's actual vested benefit under the old design is more than the account balance, the employee enters a period of wear away . During this period, the employee would be eligible to receive the already accrued benefit under the old formula, but all future benefits are accrued under the new plan design. Eventually, the accrued benefit under the new design exceeds the grandfathered amount under the old design. To the participant, however, it appears as if there is a period where no new benefits are accrued. Hybrid designs also typically eliminate the more generous early retirement provisions of traditional pensions.
Since younger workers have more years in which to accrue interest and pay credits than those approaching retirement age, critics of cash balance plans have called the new designs discriminatory. On the other hand, the new designs may better meet the needs of a modern workforce and actually encourage older workers to remain at work, since benefit accruals continue at a constant pace as long as an employee remains on the job. As of 2008, the courts have generally rejected the notion that cash balance plans discriminate based on age, while the Pension Protection Act of 2006 offers relief for most hybrid plans on a prospective basis.
While a cash balance plan is technically a defined benefit plan designed to allow workers to evaluate the economic worth their pension benefit in the manner of a defined contribution plan ( i.e. , as an account balance), the target benefit plan is a defined contribution plan designed to express its projected impact in terms of lifetime income as a percent of final salary at retirement ( i.e., as an annuity amount). For example, a target benefit plan may mimic a typical defined benefit plan offering 1.5% of salary per year of service times the final 3-year average salary. Actuarial assumptions like 5% interest, 3% salary increases and the UP84 Life Table for mortality are used to calculate a level contribution rate that would create the needed lump sum at retirement age. The problem with such plans is that the flat rate could be low for young entrants and high for old entrants. While this may appear unfair, the skewing of benefits to the old worker is a feature of most traditional defined benefit plans, and any attempt to match it would reveal this backloading feature.
Requirement of Permanence
To guard against tax abuse in the United States, the Internal Revenue Service (IRS) has promulgated rules that require that pension plans be permanent as opposed to a temporary arrangement used to capture tax benefits. Regulation 1.401-1(b)(2) states th
Account Access
AccountViewer offers you customized account information at ... Retirement Benefit Payment Services: If your retirement benefits ... is the Administrator of First Citicorp Life ...
Met Life : Account Access Links
Products may include life insurance, disability income ... as well as mutual funds, 401k plans, 403b plans and retirement ... access to your MetLife Securities online information account
Metlife Resources
Account Access : Our Associates : Products & Services ... Providers to help eligible employees with their retirement ... MetLife Resources is a division of Metropolitan Life ...
Life Advice from MetLife
Obtain 403b advice and learn how to properly administer your account with LifeAdvice from MetLife.
Met Life : Retirement Toolbox
Account Access : Products & Services : Our Location ... to factor in. Things like your estimated retirement income, potential expenses, life ... Met P&C and MSI are affiliates. Copyright ...
Compass Point Retirement Planning, Inc. :: Account Access
Account Access ... Met Life: MFS: National Planning Corporation, Inc. Pacific Life ... services also offered through Compass Point Retirement ...
MET LIFE PROFILE Introduction /History
MET LIFE PROFILE LOUISIANA STATE UNIVERSITY SYST EM 403(b) PLAN Introduction /History Me tLife'svisionisto provide financial freedom for everyone.
HRM Benefits Web site: Supplemental Retirement Accounts
Retirement >Supplemental Retirement Accounts Must meet with provider to ... Advantage of these Investment Calculators: Plan for Retirement and Wealth Building Today! ING Met Life
Met Life
Account Access : Our Firm : Our Associates : Products & Services ... from your traditional IRA or former employer's retirement plan ... Copyright 2009, Metropolitan Life Insurance Company.
Teacher'S Retirement Account In Georgia — Proyecto ...
Send this listing Benefit Life Met Net Retirement your mobile phone as an SMS text message. ... Teacher'S Retirement Account In Georgia) Teacher'S Retirement Account In Georgia