Retirement and College Savings Plans - Employee Sponsored Retirement Plans
There are two broad categories of employer-sponsored retirement plans: qualified and nonqualified. Most of the plans with which you must be familiar fall into the qualified category.
Qualified and nonqualified employer-sponsored retirement plans follow the guidelines of the Employee Retirement Income Security Act of 1974, better known as ERISA, which outlines a number of basic tenets:
- Fiduciary Responsibility: Any investment of contributions and plan assets and all plan management must follow strict fiduciary rules, and investments must be made and managed prudently and in a way that best represents the interests of all participants.
Eligibility: Qualified plans must cover all employees 21 and older who have worked for the employer for at least two years (one year for 401(k) plans). However, if the plan requires employees to work more than one year to be eligible to participate in the plan, then the plan cannot require than an employee complete more than two years of service before he or she is 100% vested.
- Generally, employees who are under age 21 and/or who have not complete the required number of years-of-service can be excluded from participating in the plan (or employees who are at least age 21 and who have performed the required years of service must be allowed to participate in the plan).
The years-of-service requirement is established by the plan, but cannot exceed two years- i.e. the employer can choose whether he wants employees to work from zero to two years before becoming eligible to participate.
- If an employer chooses an eligibility service of 1-year or less, then he can choose to have contributions vested overtime (within the statutory limits).
- If the employer chooses an eligibility service of more than 1-year- then all contributions must be immediately 100% vested.
- Vesting: All plan participants must be fully vested after three years of employment, or they must be 20% vested after three years and 100% vested after six years.
- Communication: The retirement plan must be available for review in writing, and employees must receive regular information on plan benefits, vesting procedures, account status and availability.
Most companies adopt a template plan that has been designed by a financial institution or investment company and already meets the ERISA and IRS standards for design and operation.
ERISA is also known as the Pension Reform Act, although it regulates most employee benefit plans and non-pension based personal retirement plans. Its main function is to protect participants in retirement plans against the abuse and misuse of funds within a retirement account.
The following tutorial: Retirement Plans will direct you to a multitude of tutorials that are each devoted to one of the most common retirement plans. Each will explain how to establish an account, make contributions, and withdraw funds.