Pension plans are retirement plans that allow an employer to make contributions to retirement funds on behalf of their employees. Some pension plans also allow workers to supplement these accounts by diverting a portion of their own wages to the fund on a regular basis. Regardless of the type of plan, pensions offer employees the opportunity to begin saving for retirement early in their careers.
Employers who sponsor defined-benefit pension plans are essentially guaranteeing that an employee will receive a specific monthly amount upon retirement regardless of how the fund’s investments perform. The employer will make periodic payments usually based on a formula that takes into account the employee’s earnings and years of service, although in some cases, the plan might plainly state the exact dollar amount. If the fund does not contain the predetermined amount when the employee retires, the employer will be required to make up the difference.
With defined-contribution plans, an employer makes contributions to the account in an amount equalling those made by the employee. However, the amount that an employee receives upon retirement will depend on the plan’s investment performance. This means that at the time of retirement the employee will receive the balance of whatever is in his or her account, which is based on contributions plus or minus investment gains or losses. As a result, the contents of these accounts constantly fluctuate, much like funds contained in 401(k) accounts. Finally, the Employee Retirement Income Security Act of 1974 (ERISA), is a federal law that requires companies to follow specific guidelines designed to protect the assets of employees.
Pensions are an important source of funds after retirement for many employees, so it is important to have a firm understanding of your responsibilities under the plan as well as the obligations of your employer. Determining how much is in your pension account and how much an employee will receive upon retirement can be difficult, so if you need assistance with financial planning, please make an appointment with a member of the CORE financial services team by calling 918-209-3441 to speak with someone in our Tulsa office, 405-288-1207 to reach a member of our Oklahoma City office, or 580-353-2376 to speak with a team member based out of our Lawton office.