Retirement Tool

A Profit Sharing Plan or Stock Bonus Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit sharing plan or stock bonus plan include a 401(k) plan.

Source: U.S. Department of Labor

A Simplified Employee Pension Plan (SEP) is a relatively uncomplicated retirement savings vehicles. A SEP allows employees to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements. Under a SEP, an employee must set up an IRA to accept the employer’s contributions. Employers may no longer set up Salary Reduction SEPs. However, employers are permitted to establish SIMPLE IRA plans with salary reduction contributions. If an employer had a salary reduction SEP, the employer may continue to allow salary reduction contributions to the plan.

Source: U.S. Department of Labor

A defined contribution plan does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee’s individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee’s behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.

Source: U.S. Department of Labor

A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service — for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

Source: U.S. Department of Labor

Cash balance plans are defined benefit plans. In contrast, 401(k) plans are a type of defined contribution plan.

More about Defined Benefit Plans and Defined Contribution Plans.

There are four major differences between typical cash balance plans and 401(k) plans.

* Participation. Participation in typical cash balance plans generally does not depend on the workers contributing part of their compensation to the plan; however, participation in a 401(k) plan does depend, in whole or in part, on an employee choosing to make a contribution to the plan.
* Investment Risks. The investments of cash balance plans are managed by the employer or an investment manager appointed by the employer. The employer bears the risks and rewards of the investments. Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. By contrast, 401(k) plans often permit participants to direct their own investments within certain categories. Under 401(k) plans, participants bear the risks and rewards of investment choices.
* Life Annuities. Unlike many 401(k) plans, cash balance plans are required to offer employees the ability to receive their benefits in the form of lifetime annuities.
* Federal Guarantee. Since they are defined benefit plans, the benefits promised by cash balance plans are usually insured by a federal agency, the Pension Benefit Guaranty Corporation (PBGC). If a defined benefit plan is terminated with insufficient funds to pay all promised benefits, the PBGC has authority to assume trusteeship of the plan and to begin to pay pension benefits up to the limits set by law. Defined contribution plans, including 401(k) plans, are not insured by the PBGC.

Source: U.S. Department of Labor

While both traditional defined benefit plans and cash balance plans are required to offer payment of an employee’s benefit in the form of a series of payments for life, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the benefit in terms of a stated account balance. These accounts are often referred to as hypothetical accounts because they do not reflect actual contributions to an account or actual gains and losses allocable to the account.

Source: U.S. Department of Labor

In a typical cash balance plan, a participant’s account is credited each year with a pay credit (such as 5 percent of compensation from his or her employer) and an interest credit (either a fixed rate or a variable rate that is linked to an index such as the one-year Treasury bill rate). Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer.

When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. For example, assume that a participant has an account balance of $100,000 when he or she reaches age 65. If the participant decides to retire at that time, he or she would have the right to an annuity. Such an annuity might be approximately $10,000 per year for life. In many cash balance plans, however, the participant could instead choose (with consent from his or her spouse) to take a lump sum benefit equal to the $100,000 account balance.

In addition to generally permitting participants to take their benefits as lump sum benefits at retirement, cash balance plans often permit vested participants to choose (with consent from their spouses) to receive their accrued benefits in lump sums if they terminate employment prior to retirement age.

Traditional defined benefit pension plans do not offer this feature as frequently.

If a participant receives a lump sum distribution, that distribution generally can be rolled over into an Individual Retirement Account (IRA) or to another employer’s plan if that plan accepts rollovers. See IRS Publication 575 Pension and Annuity Income: Rollovers or Publication 590 Individual Retirement Arrangements (IRAs): Traditional IRAs – Can I Move Retirement Plan Assets? for more information.

The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

Source: U.S. Department of Labor

There are two general types of pension plans-Defined Benefit Plans and Defined Contribution Plans. In general, defined benefit plans provide a specific benefit at retirement for each eligible employee, while defined contribution plans specify the amount of contributions to be made by the employer toward an employee’s retirement account. In a defined contribution plan, the actual amount of retirement benefits provided to an employee depends on the amount of the contributions as well as the gains or losses of the account.

A cash balance plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance.

Source: U.S. Department of Labor

The three major elements of your retirement portfolio are benefits from pensions, savings and investments, and Social Security benefits.

Each year the Social Security Administration sends you your personal Social Security Statement, which gives you an estimate of the monthly benefit amounts you and your family may qualify for now and in the future.

Once you’ve reviewed your Statement, you may want to explore a variety of retirement scenarios using a range of assumptions about your future earnings or when you stop working.

Source: the Social Security Administration

Social Security plays an important role in providing economic security for women. Nearly 60 percent of the people receiving Social Security benefits are women. In the 21st century, more women work, pay Social Security taxes and earn credit toward monthly retirement income than at any other time in our nation’s history.

Today, women have challenging choices to make. Some may spend their entire adulthood in a career or job outside the home. Some may work for a few years, leave the labor force to raise children and eventually return to work. And some may choose not to work outside of the home. Whether they work, have worked or have never worked, it is essential that women understand how Social Security can help them and their families.

Women tend to care for many people—spouses, children and parents. And although they have made significant strides, women are more likely to earn less over their lifetimes than men. They are less often covered by private retirement plans and more dependent on Social Security—and for a longer period of time since, on average, women live about five years longer than men.

Social Security offers a basic level of protection to all women covered by this program. When women work, they pay taxes into the Social Security system, providing for their own benefits. In addition, their husbands’ earnings can give them Social Security ­coverage as well. Women who do not work are often covered through their husbands’ work and can receive benefits when they retire, become disabled or die.
Over the years, the level of Social Security protection for women has been strengthened. For example, the amount of benefits for a surviving spouse was raised and benefits for disabled spouses also increased. Economic protection for divorced women improved with the removal of the requirement that the divorced wife must be dependent on her husband. Also, the number of years the couple must be married in order for the divorced spouse to qualify for benefits decreased.

Besides understanding the benefits to which they may be entitled, women also need to be aware of other aspects of the Social Security program. They need to know about providing Social Security coverage for anyone they may hire as a household worker or childcare provider. And they need to know some basics like what to do if they change their names.

While Social Security is a vital program, especially for women, it was never intended to cover all of their financial needs. To live comfortably, everyone needs to plan accordingly. Living within one’s means and saving for the future are big parts of that plan.

Source: Social Security Administration