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A Service Provider, - Investment Advice And Education, - Additional Considerations For Plans Investing In Employer Stock, - Reporting To The Government, - Can A Fiduciary
Terminate Its Fiduciary Duties?, - Meeting 401k Fiduciary Responsibilities

www.online-ira.com for information about 401k benefit plans-Topics include: - 401k Facts, - Types of Retirement Plans, - Defined Contribution Plans, - Defined Benefit Plans, - Contrasting Types of Retirement Plans

www.401kcensus.com for information about 401k Census "blind samples" investment and contribution data from many thousands of individual 401k investors and posts the results in this free public website for the benefit of 401k investors

 

Commentary

ERISA establishes rules for how employers must measure employees' employment service to determine how the eligibility, benefit accrual, and vesting rules apply. ARISE generally defines a year of service as 1,000 hours of service during a 12-month period. Different rules apply to counting service for purposes of eligibility, benefit accrual, and vesting.

A plan basically has a choice among three methods for determining whether you must be credited with a year of service for participation, vesting, and, in some circumstances, benefit accrual: the general method of counting service, a simplified equivalency method, or the elapsed time method. Refer to your summary plan description to see which method is used by your plan.

Who Must Be Allowed to Participate In Your Employer's Pension Plan?

Generally speaking, if your employer provides a plan that covers your position, you must be permitted to become a participant if you have reached age 21 and have completed 1 year of service. Even if you work part-time or seasonally, you cannot be excluded from the plan on the grounds of age or service if you meet this service standard. You must be permitted to begin to participate in the plan no later than the start of the next plan year or 6 months after meeting the requirements of membership, whichever is earlier. You should be aware, however, that your employer may provide one or more plans covering different groups of employees or may exclude certain categories of employees from coverage under any plan. For example, your employer may sponsor one plan for salaried employees and another for union employees, or you may not be within the group that the employer defines as covered by a plan.

ERISA imposes certain other participation rules. They depend on the type of employer for whom you work, the type of plan your employer provides, and your age. For example:

  • If you were an older worker when you were hired, you cannot be excluded from participating in the plan on the grounds of age just because you are close to retirement age.
  • If upon your entry into the plan, your benefit will be immediately fully "vested," or nonforfeitable (see Page 23), the plan can require that you complete 2 years of service before you become eligible to participate in the plan. 401(k) plans, however, cannot require you to complete more than one year of service before you become eligible to participate.
  • If you work for a tax-exempt educational institution an your plan benefit becomes vested after you earn 1 year of service, the plan can require that you be at least age 26 (instead of age 21) before you can participate in the plan.
  • If your employer maintains a SEP, you must be permitted to participate if you have performed services for the employer in 3 of the immediately preceding five years.

401k Tips and Facts:

According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).

The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.

401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.

What Is Benefit Accrual And How Does It Work?

When you participate in a pension plan, you accrue (earn) pension benefits. Your accrued benefit is the amount of benefit that has accumulated or been allocated in your name under the plan as of a particular point in time. ERISA generally does not set benefit levels or specify precisely how benefits are to accumulate.

Plans may use any definition of service for purposes of benefit accrual as long as the definition is applied on a reasonable and consistent basis. Service for purposes of benefit accrual generally takes into account only the years of service you earn after you become a plan participant, not all service you may perform since you were hired by your employer. Employees who work less than full time, but at least 1,000 hours per year, must be credited with a pro rata portion of the benefit that they would accrue if they were employed full-time.

To illustrate: If a plan requires 2,000 hours of service for full benefit accrual, then a participant who works 1,000 hours must be credited with at least 50 percent of the full benefit accrual.

A special rule applies to SEPs: all participants who earn at least $400 (in 1995) in compensation from their employers are entitled to receive a contribution or, if the SEP is a salary reduction SEP, to elect to make a contribution.

Since ERISA generally does not regulate the amount of your benefit, you can estimate how much pension you are building up only by examining the summary plan description or the plan document. These documents should explain how you earn service credit for full benefit accrual each plan year.

What Other Rights Are Protected As Part Of Your Accrued Benefits?

Your accrued benefit includes more than just the amount of benefit you have accumulated. Your plan provides you with various rights and options, some of which are protected rights attached to your benefit amount. As a general rule, protected rights cannot be reduced or eliminated, nor can they be granted or denied at your employer's discretion. If a plan feature you care about has been eliminated, this section is designed to help you determine if it was a protected right or not.

The rights that are protected include optional forms of benefit, early retirement benefits, and retirement-type subsidies.

  • Optional forms of benefit payment. An example of an optional form of benefit that your plan may provide is the right to receive payment of your benefits in a lump sum payment rather than as an annuity.
  • Early retirement benefit. ERISA does not require a pension plan to provide participants with the option to retire earlier than at the plan's normal retirement age, but if such an option is offered, a plan generally may not be amended to eliminate the right to take such an early retirement with respect to benefits accrued before the amendment.
  • Retirement-type subsidy. Retirement-type subsidies are also a protected part of your benefit and cannot be eliminated retroactively.

Certain important plan features are not protected, such as a social security supplement, the right to direct investments, the right to a particular form of investment, the right to take a loan from a plan, or the right to make employee contributions at a particular rate on either a before- or after-tax basis.

Can Your Plan Reduce Future Benefits?

ERISA does not prohibit your employer from amending the plan to reduce the rate at which benefits accrue in the future. For example, a plan that pays $5 in monthly benefits at age 65 for years of service up through 1995, may be amended to provide that years of service beginning in 1996 will be credited at the rate of $4 per month.

If you are a participant in a defined benefit plan or a money purchase plan, you must receive written notice of a significant reduction in the rate of future benefit accruals after the plan amendment is adopted and at least 15 days before the effective date of the plan amendment. The written notice must describe the plan amendment and its effective date.

What Happens To Your Service Credit If You Leave Your Job And Later Return?

A break in service can have serious consequences for your pension if it extends for a long enough time and your pension benefit is not yet fully vested. However, ERISA does not permit your accrued benefit to be forfeited if you have a short break in service. ERISA establishes rules governing the circumstances under which a plan is required to continue to credit a participant with service earned before a break in service if the participant later returns to employment. These rules are very technical, but in general guarantee your service credit cannot be forfeited for absences shorter than 5 consecutive years. If you need to take a leave of absence, you should carefully examine your plan s rules so that you do not inadvertently and unnecessarily lose pension benefits you have accrued.

What Happens To Your Benefit Accruals (And Your Pension Payments) If You Retire And Later Go Back To Work?

If you continue to work past normal retirement age (without retiring), you continue to accrue benefits, regardless of age. However, a plan can limit the total number of years of service that will be taken into account for benefit accrual for anyone under the plan. If you retire and later go back to work with your employer, you must be allowed to continue to accrue additional benefits, subject to any such limited on total years of service credited under the plan.

Plans that provide for the payment of early retirement benefits may suspend payment of those benefits if you are reemployed before reaching normal retirement age. However, if the plan suspends payment of benefits before normal retirement age, under circumstances that would not have permitted a suspension after normal retirement age, and the plan pays an actuarially reduced early retirement benefit, the plan must actuarially recalculate your monthly payment when you begin again to receive payments.

Under certain circumstances (described below), your pension payments after you reach normal retirement age may be suspended if you return to work. For example, ERISA permits a multiemployer plan to suspend the payment of normal retirement benefits if you return to work in the same industry, the same trade, and the same geographical area covered by the plan as when benefits commenced.

Before suspending benefit payments, however, the plan must notify you of the suspension during the first calendar month in which the plan withholds payments. The notification must give you the information on why benefit payments are suspended, a general summary and a copy of the plan's suspension of benefit provisions, a statement regarding the Department of Labor regulations, and information on the plan's procedure under which you may request a review of the decisions to suspend benefit payments. If most of this information is contained in the plan's summary plan description, the notification may simply refer to the appropriate pages of the summary plan description.

A plan that suspends benefit payments 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 the administrator of your plan to ask if your pension benefits would be suspended.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.e401k.net

What Is Vesting And How Does It Work?

Vesting refers to the amount of time you must work before earning a nonforfeitable right to your accrued benefit. When you are fully "vested," your accrued benefit will be yours, even if you leave the company before reaching retirement age. Generally, if you are employed when you reach your plan's "normal" retirement age (usually 65), you will be fully vested. You also must be permitted to earn a vested right to your accrued benefit through service as described below.

You are always entitled to 100 percent vesting in your own contributions and salary reduction contributions and their investment earnings. However, if your employer contributes to your accrued benefit (as most do), you may be required to complete a certain number of years of service with the employer before the employer portion of your accrued benefit becomes vested. Thus, if you terminate employment before working for a long enough period with your employer, you may forfeit all or part of your accrued benefit provided by your employer.

You must be permitted to earn vesting credit according to a vesting schedule that is at least as generous as one of the two following schedules. ERISA sets these standards as a minimum for counting vesting service. Plans may provide a different standard, as long it is more generous than these minimums. Check your summary plan description for a description of your employer's vesting schedule.

7-YEAR "GRADED" VESTING SCHEDULE

Years of vesting service
you have completed.
Percentage of your accrued
benefit that is vested.
Less than 3 0%
At least 3 but less than 4 20%
At least 4 but less than 5 40%
At least 5 but less than 6 60%
At least 6 but less than 7 80%
At least 7 100%

5-YEAR "CLIFF" VESTING SCHEDULE

Years of vesting service
you have completed.
Percentage of your accrued
benefit that is vested.
Less than 3 0%
At least 5 100%
With some exceptions, once you begin participating in a pension plan, all of your years of service with the employer maintaining the plan after you reached age 18 must be taken into account to determine whether and the extent to which your accrued benefits are vested, including service you earned before you began to participate in the plan and service you earned before the effective date of ERISA.

However, ERISA does allow plans to disregard certain periods for purposes of determining an employee's vesting service. If you wish further details on what periods of service may be disregarded, see your summary plan description or the plan document to find out what periods are counted in your plan.

When you receive a benefit statement, compare the amount of your accrued benefit with the amount or percentage of your vested benefit to determine its accuracy. If these items are not clear from your benefit statement, ask your plan administrator. The plan administrator send you a benefit statement each year. If not, you may request a copy. In order to keep track of your vesting service, you may want to keep records of your hire date, the date you began participating in the plan, and the dates of any leaves of absence that could affect your total service.

If the plan's vesting schedule is changed after you have completed at least 3 years of service, you have the right to select the vesting schedule that existed prior to the change for the entire length of your service, rather than the new schedule.

May Plans Use Other Vesting Schedules?

Multiemployer plans can have a slower vesting schedule, and top-heavy plans must have a faster vesting schedule. A multiemployer plan is a plan to which several unrelated employers are required to contribute under one or more collective bargaining agreements. Participants in a multiemployer plan who are covered by the collective bargaining agreement may need to complete 10 years of service to be fully vested, in accordance with the following vesting schedule:

Years of vesting service
you have completed.
Percentage of your accrued
benefit that is vested.
Less than 10 0%
At least 10 100%
Plans are considered "top-heavy" if they are tax qualified and more than 60 percent of the benefits accrue to certain owners and officers, otherwise known as "key employees." This could, for example, occur in small companies that have frequent turnover of rank-and-file workers. In years in which a plan is top-heavy, you have the right to both faster vesting and minimum benefits, if you are not a key employee.

All benefits under a SEP must be fully vested at all times.


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