Simply Junior

Retirement plans are employee benefit plans that are set up or maintained by an employer or a union that will provide income after the individual worker retires. There are different types of plans, including the 401(k) plan, and the defined benefit plan.

Most people who work in the private sector are covered by ERISA, which is the Employee Retirement Income Security Act. ERISA provides some protections for those who participate in retirement plans. In addition, the individuals who manage the plans have to meet conduct standards under the responsibilities that are specified under the law.

The retirement plan set up by your employer is an essential part of your financial security in the future. It’s important that employees understand how their plans work, and what benefits they will receive. Just as you keep track of bank accounts, you should keep track of your retirement benefits.

The people who are responsible for the oversight and management of retirement plans have to follow certain rules that cover the operation of the plans, handling the money in the plan, and watching over the firms that are hired to manage the money. In addition, you should also understand and monitor your benefits.

There are two major types of retirement plans, and they are described as defined contribution and defined benefit.

A defined benefit plan is funded by your employer, and it promises you a monthly dollar amount upon your retirement. Plans like this may state the benefit as a dollar amount, or may calculate it through various formulas.

A defined contribution plan doesn’t tell you that you’ll get a specific amount when you retire. Instead, you or your employer put money toward your account and then these monies are invested. Most of the time, you are responsible for choosing how the monies are invested. In some plans, your employer will match your contributions.

Employers are offering you a benefit when they open retirement plans for their employees. Federal law does not require any employers to offer a plan, and the law also does not prohibit them from doing away with a plan they already have. Of course, if you have monies invested in a plan that your company terminates, the funds you put it will be available for withdrawal, or for rollover to a different 401-k from another company.

The PBGC – Pension Benefit Guaranty Corporation – guarantees that certain retirement benefits will be paid to employees or retirees in most plans, if the plan is terminated and not enough money s left to pay all of its promised benefits.

Check with your Human Resources or Benefits Department at your company, to find out what type of retirement plan your company offers, and which one you signed up for when you hired on. Then keep an eye on the accounts so you can make sure that the money will be there for your retirement.

It goes without saying that retirement plans are really vital for employees and that is the reason why, in order to choose an appropriate one, you need to know how to contrast different variants.

So, here are the key features that should be considered while comparing retirement plans:

1. The type of the plan.

There are 2 basic types of retirement plans: defined contribution and defined benefit.

Defined contribution plan guarantees the participant a monthly benefit at retirement. It should be also pointed out that usually this benefit is based on the following factors:

- salary;

- age;

- how many years a person works for a particular employer.

As concerning a defined benefit plan there is a need to mention that the employee (employer) contribute to the employee’s individual account under the plan. Also, the employee has the right to decide how the personal account is invested.

2. When exactly the participation starts

Before checking this you should know that there are minimum requirements set by a Federal Law but, as you understand, plans differ from each other, so the one you are considering may provide even a better option than you might expect.

To provide you with more details it should be mentioned that a typical retirement plan usually requires a person to be as a minimum 21 years old. Also, it is essential that an employee has at least a year of work with the company in order to be able to participate in a plan.

3. Employer contributions.

Some plans require contributions to be made in order to be able to pay benefits in the future while for others this is not a necessary condition.

4. Guarantee of the benefits.

For example, defined benefit plan guarantees a certain amount of benefits while the other type, defined contribution plan, will provide you with no guarantees.

5. The type of retirement benefit payments.

These could be monthly annuity payments or, the other case is that the account of the client may be changed into an individual retirement account via which a retiree will be able to withdraw the money.

6. Investment managing.

There are 2 probable options:

the investment is managed by the retirement plan; the investment is managed by an employee personally. These were the most common aspects that are usually evaluated when choosing a retirement plan. By taking into account the mentioned points it will be easier for you to make the right and well-informed choice and this consequently means that you will be able to choose a plan that is perfect for you.

People like to be proactive rather than being reactive. Thus everything needs to be planned in advance. Retirement planning has become a necessity of life. And nowadays, the world is forcing you to do it because of following factors.

Factors that force you to do the retirement planning:

Maintaining status in society Increased Industry regulations Tax planning Uncertainty of the market Security of life Future planning State and federal government are actively focusing on regulating pension planning Benefits and incentives given for advance retirement planning

Don’t ever think that the social security is enough for you. You’ll end up fooling yourself only. To maintain quality of your life and your dependable life proactive financial planning has to be done for the retirement.

Many pension plans are available in the market each having their own pros and cones. Pension plans can be broadly divided into 2 types.

1. IRA – Individual retirement Accounts

2. Employer sponsored plans

IRA – Individual Retirement Accounts: These accounts are opened by the individual to have the future retirement income. It is managed by individual.

Two types of IRA are used popularly

1. Traditional IRA- Here your money will be taxed on withdrawal. If you withdraw before set limit age say 59.5 years you have to bear penalty by cut in the benefits.

2. Roth IRA- Here there is absence if penalty for the withdrawal anytime and the early contributions will have to bear tax. But no tax on the interest gained. Thus here earning will be free of taxes.

Employer Sponsored Plans: These accounts are managed by employer

DB plan – defined Benefit plan:

Quite old plan It was popular during 50s era. But after 70 s it was less popular. Here your income will be fixed and cannot be changed. Thus it will be like a future salary for you. It’s a low risk low return plan.

DC plan – Defined Contribution plan:

Her employer and employee both invest amount in a preset ration. Investments are done on mutual agreement like in Mutual funds or stock markets etc. Here your benefits are realized based on the investment performance in the market. SO it can be a high risk high return plan if both employee and employer agree to be in.

401(K) plan: Nowadays mostly used by the employers. Here tax deferral is the big advantage till 59.5 years of the employee.

Profit sharing plans: Here an employer pays all the contribution to share future profits. Profit will be shared between employer and employees. It has been settled and agreed well before.

Which one to select?

Now which one from above will be best is the subjective issue and varies from each person. Generally following things should be considered before selecting the appropriate plan for you.

Which plans you are eligible for? – read all eligibility conditions

Which plans suits your age?

What are the benefits for me in each? Compare it in your perspective

Is the plan flexible enough? You shouldn’t ended up in investing in such way that you can access your money even if you need it.

Taxes and cost: do your taxes and cost planning and forecasting can try to synchronize your plan to cope up with it.

Many employers will offer a 401(k) to their employees. A 401(k) plan offers many advantages to employees. The biggest advantage is tax-deferred investing. These accounts are not taxed until distributions are made.

For 2011, an employee can contribute up to $16,500 into a 401(k) plan. Taxpayers over age 50 are allowed to contribute another $5,500 as a “catch up” contribution for a total of $22,000. This catch up provision was implemented because Congress did not think people were saving enough for retirement. Imagine that-for once they got it right.

Why should you contribute to your 401(k) plan?

* You are on your own with your retirement. That’s right, Long gone are the days when someone would go and work for an employer for 30 years and then retire. They would be eligible for a pension and get their social security benefits. Now most companies no longer offer a pension plan.

* Although some employers have eliminated their pension plan, many will still offer a company match. If your employer offers a match, participate in the 401(k) plan at least up to the amount the company is going to match.

What is another big benefit to a 401(k) plan? Having the money taken out of your paycheck automatically. This is huge. Remember, you can’t spend money you don’t have.

Do you want to have financial piece of mind in retirement? Put the most you can into your 401(k) plan because you’re going to need it.

Action Item: Employees should be participating in their employer 401(k) plan. This should be at least up to the amount of the employer match. For employees that aren’t covered by a pension plan, the 401(k) plan will likely be the foundation of their retirement plan.

Thomas F. Scanlon, CPA, CFP ®

The GMAC Retirement plan is the most commonly seen of retirement plans – the normal pension system. The GMAC retirement plan is also called a ‘defined benefit plan’. According to the terms of a defined benefit plan, when the employee reaches a specific age, he or she can retire and rest assured that whatever retirement benefits had been agreed upon will be paid every month after that.

The calculation of these benefits is usually based on a predetermined formula that usually uses the number of years the employee was a part of the company and in what all positions, and the position in which he or she retired – basically, the salary information. Once the person reaches the retirement age, he or she will be entitled to the benefits for as long as they live.

Benefits such as these, under the GMAC retirement plan, are usually called ‘accrued benefits’. Under the GMAC retirement plan, individual employees do not hold individual accounts. Another thing to keep in mind is that under such the GMAC retirement plan, the alternate payee is not given one sum at one time, as a lump sum. According to the terms of this plan, the alternate payee will be paid the benefit monthly, during the lifetime of either the alternate payee or the participant.

There are two approaches, generally, for a plan like the GMAC retirement plan. The first is the Shared Interest Approach. The main features of this approach are that the alternate payee never receives any sort of benefits until and unless the participant, that is, the employee, actually retires. Second, once the employee has chosen such an annuity with an ex-wife or ex-husband, is the employee marries again, the spouse could be left with no benefits.

The second approach in the GMAC retirement plan is the Separate Interest Approach. In this approach, the alternate payee can choose to start receiving the benefits he or she is entitled to as soon as the employee reaches the earliest possible retirement age. Basically, even in the unfortunate event of the employee’s death, there will be no difference to the benefits that the alternate payee already receives. The biggest advantage, of course, of this approach is that the alternate payee is not made to wait till retirement to receive any benefits. Second, unlike the other approach, the employee will not have to choose anything at any point that might affect his or her wife or husband in case the employee chooses to marry again.