Pension plan refers to a retirement investments plan whereby a company preserves an endowment for the benefit its human resources for their sequestration (Saglik, 2009). The collection of the pool of funds is throughout the employee’s tenure of working in a particular organization and upon retirement age, he or she has the right to access the money. Interests also accrue within the period hence ensures the individual maintains a clean, stable lifestyle despite him or her not working. The importance of having the pension plan is to ensure that the needs of the retired employees are met. This also reduces the dependency ratio in the population. Both young and old contribute to economic growth and sustainability of the economy.
Once an individual has retired, the pension plan gives them a sense of security in terms that, one can engage in various businesses without having too much worry on the acquisition of the necessary recourses. There are certain laws and regulations by the Department of Labor (DOL) that govern all pension plans. This paper seeks to explore various pension plans; the best suited in this case and rules governing them (Saglik, 2009).
Key Words; IRA (Insurance Regulatory Authority), Pension Plan, ERISA (Employee Retirement Income Security Act), Pension Benefit Guaranty Corporation (PBGC)
Types of Pension Plans
It is important for an organization to have a proper retirement benefit plan. There are two categories of pension plans, which include; defined benefit plan and the defined contribution plan.
Defined Benefit Plan
This is whereby the profit on retirement is resolute by a specific modus operandi rather than relying on investment proceeds. Social Security in the Unites States is a type of a defined benefit pension plan. According to Saglik, (2009) the employer ensures that the staffs obtain a specific amount of profit upon sequestration despite the consequences of the performance of the fundamental outlay pool. The centralized policies position the amount that managers must put in to the plan in order to ensure that the scheme has adequate money to compensate the benefits when payable. This arrangement is employer sponsored hence the human resources do not make a payment to the plan.
The promised benefit is set on a formula in the scheme mostly using the combination of the staff’s age, number of years he or she has worked in the organization and the remuneration (Cch, 2009). Other payment options are available in this plan despite the fact that the retiree has monthly annuity payments until death. The Federal Government through the Pension Benefit Guaranty Corporation (PBGC) warrants several amounts of remuneration. If a worker departs after gaining in a scheme but ahead of his or her age of retirement (Clark, et al, 2011), the profit remains with the arrangement awaiting the employee to make a claim for it at sequestration.
Defined Contribution Plan
The employers on behalf of their employees make this payment. The amount of money given is very specific but at times varies according to the contributions made by the employees. The mostly used contribution schemes are the 401(k) and the 403 (b) plans (Jarnagin, 2008).
401 (k) or the 403 (b)
Most individuals view this as the best and most convenient way to start devoting to retirement. The cash is in remission through payroll subtraction. If one decides to switch job stations, he or she can simply roll the account over whereby one does not have to cash out the plan, merge the cash with the new employer’s plan (Cch, 2009). The 403 (b) plan serves the nonprofit individuals and teachers. A sole proprietor can also contribute as the employer and the employee under the solo 401 (k) plan.
Other Types of Savings Account
Simplified Employee Pension (SEP) IRA, it is an account used by the small company owners. One can contribute up to twenty-five percent of the income earned. This scheme is much easier to set up rather than the Solo 401 (k) plan. An institution that has less than a hundred employees should consider the Simple IRA with little formalities. With this, any individual can contribute. The best thing is that the money multiplies tax-free (Jarnagin, 2008). One can make a payment to both IRA and 401 (k). Employed individuals cannot deduct IRA contributions from the taxable earnings.
In Roth IRA, one contributes after-tax money but the amount contributed is not taxable. The cash grows without being taxed and when one withdraws after the age of fifty-nine and a half years, he or she will not be charged withdrawal tax. One can withdraw the contributed amount at any time with zero penalties. Individuals with high removable health indemnity plans on the other hand, use health savings account (Clark, et al, 2011).
Legal Issues and Laws Governing Retirement Plans
Employee Retirement Income Security Act (ERISA) of 1974 is a centralized decree that places lowest principles for most willingly recognized pension and healthiness policies in private business to grant protection for persons in these schemes (Magratten, 2010). The law requires the schemes to provide the contributors’ with information about funding, vesting, fiduciary responsibilities, features, benefits accrual, and sets minimum requirements for participation. Proper plans to establish a complaint and the petition process for participants in order to gain their profit gives the contributors the power to sue when there is a breach of contract (Magratten, 2010). In a case whereby the defined benefit plan is expired, the employees are assured of specific benefits through a centrally licensed corporation referred to as the Pension Benefit Guaranty Corporation (PBGC).
The Solo 401(k) through payroll subtraction is definitely the best plan to adapt with the help of the cooperation of the employees. This will boost the confidence of the work force since they are securing their future.
From the above, we can conclude that a pension plan is as important to an individual as it definitely secures one’s future financial status. In as much as there are various employers’ contributions that are required, some retirement schemes have a controlled savings component (Jarnagin, 2008). The various laws and regulation that regulate the Pension plans have proven to be very helpful and insightful to the public. It is paramount for an employer to educate and provide proper pension plans for their employees in order to help them secure their future.
Saglik, Y. (2009). Corporate and Private Pension Plans in the United States: A General Abstract.
Clark, R. L., Craig, L. A., & Sabelhaus, J. E. (2011). State and Local Retirement Plans in the United States. Cheltenham: Edward Elgar Pub.
Cch, I. (2009). Pension & employee benefit code erisa 01/09: Committee reports. Place of publication not identified: Kluwer Law International. Jarnagin, B. D. (2008). 2009
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