A pension plan is a retirement plan for employees to continue gaining benefits after their retirement.
It was created after the implementation of The Employee Retirement Income Security Act in 1974 to protect investors’ retirement assets and the law listed several guidelines that companies must follow.
It requires employers to invest in pension funds on behalf of their employees and the generated income will goes to employees when they retire. The companies that offer pension plans is known as plan sponsors or fiduciaries. During this process, employers need to clarify the investment options and the matched dollar amount of worker contribution.
There are two major types of pension plans: defined-benefit plans and defined-contribution plans.
How does it work?
It is quite easy to be enrolled in a pension plan. Employees will generally be enrolled in a pension plan within one year of employment automatically. Employers will take out a certain portion of money to invest in a pool of funds and the income will be given to employees.
However, besides employers’ regular contribution, some pension plans allow employees to make extra investment. It means that workers can contribute a part of their own salary into the funds to increase the profit they can get after retirement. Note that if employees leave the company before retirement, they will lose a part of or even all of their pension benefits.
Meanwhile, employees should be well aware of another concept: vesting. Vesting is mostly related with employees’ working years and it refers to the pension assets that are owned by employees. If employees are enrolled in a defined-contribution plans, all their individual contribution is vested. However, employees are not able to withdraw their retirement contribution even if they are vested completely. If their companies offer them company stock instead, only a part of their individual contribution is given to them until they are fully vested.