Defined contribution plan - are retirement plans where the contribution is specified, but not the benefit. These plans focus on what goes into the plan and who contributes what. How much the plans will pay on retirement is dependent on the return earned by the plan
DOL - The United States Department of Labor is a Cabinet department of the United States government responsible for occupational safety, wage and hour standards, unemployment insurance benefits, re-employment services, and some economic statistics. The purpose of the Department of Labor (DOL) is to foster, promote, and develop the welfare of the wage earners, job seekers, and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights. In carrying out this mission, the Department of Labor administers and enforces more than 180 federal laws. These mandates and the regulations that implement them cover many workplace activities for about 10 million employers and 125 million workers.
Early withdrawal penalty - If you withdraw money from a qualified retirement plan, you may be subject to an additional tax of 10%. This is penalty for taking an early distribution from an individual retirement account (IRA), 401(k), 403(b), or other qualified retirement plan before reaching age 59 1/2.
ERISA (Employee Retirement Income and Security Act) - The Employee Retirement Income Security Act of 1974, or ERISA, protects the assets of millions of Americans so that funds placed in retirement plans during their working lives will be there when they retire.
ERISA 408(b) (2) - On July 16, 2010, the DOL released an “interim final regulation” under ERISA Section 408(b) (2) related to the disclosure of fees by service providers. Covered service providers will need to comply with the regulation by July 16, 2011, for all contracts or arrangements, regardless of whether they were entered into before the effective date. The new regulation amends a prohibited transaction rule under ERISA and the Internal Revenue Code. That rule says that it is a prohibited transaction for a plan to enter into an arrangement with a service provider unless the “arrangement” is reasonable and the compensation being received by the service provider is reasonable. The new regulation adds disclosure requirements for determining whether a service provider arrangement is reasonable.
Fiduciary - A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit.
401(k) plan - is an employer-sponsored retirement plan, sometimes called a defined contribution plan (in contrast to a defined benefit pension plan). It allows employees to make pre-tax contributions to the plan, up to a specified amount each year. Employers may also make contributions; most employers choose to match up to a certain percentage of employee contributions. The plan gets its name from Section 401(k) of the Internal Revenue Code.
403(b) plan - The 403(b) is a tax deferred retirement plan available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code. Contributions and investment earnings in a 403(b) grow tax deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income. See IRS Publication 571 for IRS details on the 403(b).
457 Plan - Named after the bit of Internal Revenue Code that created them. Contributions are tax-free and can grow tax-free until the money is withdrawn.
There are two types of 457(b) plans. One is for government employees, including state and local workers, police officers, firefighters and some teachers. The other covers only highly compensated employees of non-profit corporations, such as hospitals, charitable groups and unions.
Non-contributory plan - Pension plan which is completely funded by the employer, not the employee.
Non-qualified plan - A retirement plan that does not qualify for special tax treatment under the Internal Revenue Code or the Employee Retirement Income Security Act. In essence, a non-qualified retirement plan is a contract to provide pension benefits. Individuals can create one, but most are created by employers.
Contributors to non-qualified plans don't get the same tax benefits as contributors to qualified plans, such as 401(k) s, do. Since they are not constrained by the codes, non-qualified plans can be much more flexible in setting benefit amounts and timing payouts. Most are created to attract and retain highly paid employees.
Qualified plan – A plan authorized by the Internal Revenue Service and must adhere to certain rules and regulations. Participants in the plans, often sponsored by an employer, may accumulate money in their accounts on a tax-deferred basis. A 401(k) plan is an example, but an IRA is also a qualified retirement plan.
Required Minimum Distribution -A Congressionally-mandated distribution from a qualified retirement plan. Starting with the April 1 after you reach 70.5 years old, you must take annual distributions from your qualified retirement plans, such as your 401(k) and IRA. The amount you must distribute is based on the value of your accounts at the beginning of the year for which you are required to take a distribution. That total is then divided by your life expectancy as determined by the IRS.
Roth IRA accounts are not subject to RMDs. Also, a 401(k) where you are still employed is exempt from RMDs. Failure to take a RMD results in a 50% penalty.
Summary Plan Description (SPD) - One of the most important documents participants are entitled to receive automatically when becoming a participant of an ERISA-covered retirement or health benefit plan or a beneficiary receiving benefits under such a plan, is a summary of the plan, called the summary plan description or SPD. The plan administrator is legally obligated to provide to participants, free of charge, the SPD. The summary plan description is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits. If a plan is changed, participants must be informed, either through a revised summary plan description, or in a separate document, called a summary of material modifications, which also must be given to participants free of charge.
Vesting - refer to the ability of an employee to take employer contributed retirement benefits from a retirement plan when the employee leaves the company. Employees can always take their own contributions from a plan when they leave a company, so employee contributions are always 100 percent vested. Vesting can occur anywhere from 5 to 10 years after hire, depending on the provisions of the individual company retirement plan.
Cliff vesting - Under a cliff vesting schedule, employees cannot keep any of an employer's matching contributions if they leave before a certain date. But once that date arrives, they are 100% vested in all of the matching contributions.
Employers can't dangle the carrot forever: Federal law puts a three-year limit on cliff vesting schedules. Stay longer than that, and Uncle Sam says you get to keep the change.
Workers are always 100% vested in their own contributions and in any growth their accounts earn
Graded Vesting - graded vesting schedule is one way to determine when workers get to keep the matching money that some of their employers deposit in their retirement accounts.
It is called a "graded" vesting schedule because a worker's right to permanently keep the money increases over time.
In a five-year graded vesting schedule, for example, a worker might gain the right to permanently keep 20% of the employer's matching contributions in the first year, 40% in the second year, and so on until he or she is 100% vested -- has the right to keep all of the employer's contributions -- at the end of five years.
Not all employers offer matching contributions, and vesting schedules can vary from plan to plan. But federal law requires all graded vesting schedules to reach 100% within six years.
It's important to note, of course, that vesting schedules apply only to employer contributions. Workers are always 100% vested in their own contributions.