Retirement benefits are payable when you retire. Your pension payments and personal savings are held in trust for you until you turn age 59 1/2. However, if you're terminated prior to your normal retirement age, then you should understand how this impacts your retirement pension and personal employer-based retirement savings account. These plans include 401k plans, 403b plans and other accounts where you make personal contributions.
A pension is a defined benefit plan which is funded entirely by your employer. These plans accumulate a substantial savings for you and then distribute payments to you over time when you retire. These plans are sometimes referred to as "defined benefit plans" since the benefit you receive is defined and does not change. Your benefit payment works like an annuity payment from an insurance company. In fact, many pensions use annuities to make payments to you when you retire.
A 401k plan, 403b plan and other similar plans are called defined contribution plans. These plans do not promise a benefit when you retire. Instead, you make contributions to the account. The employee may make contributions to the account as well. At retirement, you receive the balance of your account and may do whatever you wish with it. You may use this as an emergency savings or convert some or all of this savings to monthly payments similar to pension plan payments.
You do not lose pension benefits and personal savings that you have earned just because you were terminated from employment. The Pension Benefit Guaranty Corporation (PBGC) and The Employee Retirement Income Security Act (ERISA) ensure that you receive all of the money accumulated in your pension and personal retirement account.
You may lose benefits only to the extent that you have not earned them. For example, many pensions provide for a vesting schedule. This means that you must work for the employer for a minimum number of years before you can take advantage of the benefits of the plan. Likewise, defined contribution plans may also have vesting schedules for all contributions made by your employer. Since some defined contribution plans allow employer contributions along with employee contributions, the vesting schedule encourages you to stay with your employer for a long period of time. You'll need to check with your employer about what vesting schedule he has adopted. However, the IRS generally allows several schedules. A three year cliff schedule means that you earn no benefits from your employer's contributions until after three years. A graded vesting schedule means that you earn your employer contributions over several years, with each year resulting in an increasing amount of earned retirement benefits.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- IRS.gov: Retirement Topics - Vesting
- United States Department of Labor: Frequently Asked Questions about Pension Plans and ERISA