Retirement Planning Terms Everyone Should Know

The team at The Participant Effect^SM  knows that a lot of people think retirement plans can be complex and often confusing. However, as individuals assume more and more responsibility for planning for their own retirements, it’s important that you understand some of the terminology you’ll encounter:

401(k) retirement plans. Established in 1978 by section 401(k) of the Internal Revenue Code, these defined contribution plans allow employees and/or employers to contribute money to the plan, where it can be invested in a variety of options. Employee contributions are on a pre-tax basis, and earnings in the plan aren’t taxed until withdrawal.

Defined benefit plans. Often referred to as a traditional pension, a defined benefit plan establishes a specific amount of money a retiree will receive in retirement.

Defined contribution plans. These plans don’t promise a specific amount at retirement. You and/or you employer contribute to your individual account, and you ultimately receive the balance, including any investment gains or losses. One example of a defined contribution plan is a 401(k) plan.

ERISA. The Employee Retirement Income Security Act is a federal law passed in 1974 that governs most retirement and health plans. Some of its important provisions include requirements to provide plan participants with information, outlining fiduciary responsibilities for those who administer the plan, and establishing protections for employees.

ESOPs. Employee stock ownership plans are defined contribution plans where contributions are in the form of company stock.

IRAs. An individual retirement account allows people to save for retirement on a tax-deferred basis or with tax-free growth. There are three main types: traditional IRAs, Roth IRAs, and rollover IRAs. With a traditional IRA, you make contributions with money you may be able to deduct on your taxes, and earnings can grow tax-deferred until retirement. Roth IRAs are funded with money you’ve already paid taxes on, and those funds can grow tax-free and you can withdraw money tax-free in retirement (with some conditions). Rollover IRAs are for money that’s moved from an employer-sponsored plan, like a 401(k).

Profit-sharing plans. These defined contribution plans are also called stock bonus plans, and allow employers to determine annually how much will be contributed to the plan from profits or other sources.

SEPs. Simplified Employee Pension plans allow employers to make tax-deferred contributions to individual retirement accounts (IRAs) owned by employees.

SIMPLE IRAs. A Savings Incentive Match Plan for Employee of Small Employers is a way that businesses with 100 or fewer employees can offer a retirement plan. SIMPLE IRAs are funded through employee salary reductions and employer matching contributions, much like a 401(k) plan.

If you’re a participant in a retirement plan, remember that your plan will have a formal, written document that explains how it operates and its requirements. You can request a copy from your plan administrator. If you have questions about your plan, the professionals at The Participant Effect^SM can help. Call us at 888-968-9168 or browse our website.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

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