Your employer's pension plan may end up providing you with a significant portion of your retirement income. A pension funded entirely by your employer represents a unique kind of risk to you though. What happens if you are let go from your job? You'll want to know your rights in terms of what you are entitled to receive from your pension plan.
A defined benefit plan is a type of pension plan that provides a guaranteed pension benefit. Your pension benefit is based on your income and your years of service. Once the pension formula has been established by your employer, and a pension benefit amount is promised, you start to accrue your benefit. Insurance contracts, called annuities, are often used to secure this benefit and guarantee payments to you when you retire.
Your pension benefits won't be taken away from you if you're terminated as long as you've earned the pension benefit. For example, an employer paying $5 per month for years of service must give you the pension benefit that has already accrued based on that benefit payment. If an employer decides to dramatically reduce contributions to the pension plan, he must inform you 45 days prior to making the changes in the contribution formula.
You may not be fully vested in your pension plan to earn the benefits that have accrued. Employers may mandate that you have at least five years of service before you earn 100 percent of the employer's contributed amount to the pension. Alternatively, the employer may employ a graduated vesting schedule where you must work seven years to earn 100 percent of your pension benefits. During this seven-year time frame, you earn an increasing portion of your pension corresponding with an increase in your years of service.
You should consider saving money on your own in addition to an employer pension. While the pension plan may provide you with significant income for retirement, a private savings also provides an important benefit that you will be 100 percent vested in regardless of how many years you work. With a pension, it's possible to lose some or all of your benefits if you haven't earned them. This never happens with an individual retirement account (IRA).
- U.S. Department of Labor: What You Should Know About Your Retirement Plan
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, et al.; 2007