Long gone are the days when most companies provided a pension plan for their employees. Today, employees are primarily responsible for saving their dollars for retirement.
This is an important responsibility. Nothing can ruin a good retirement like not having enough money. Fortunately, employees can take advantage of the many types of retirement savings plans that employers offer today.
These plans usually require that employees contribute a portion of their regular paychecks for their retirement. This percentage can vary, but many plans allow workers to contribute up to 15 percent of every paycheck to retirement savings. Companies then invest these dollars in a range of stocks, bonds and other investment vehicles. Most employees have the option of directing their dollars in specific directions, to help the dollars grow based on the employees need. Many employers will, at the end of the year, make a contribution, called a matching contribution, to the savings of their employees. This helps workers grow their retirement dollars at an even faster clip.
Understanding how your employer's retirement savings plan works is important. You need to do everything you can to make sure that you've saved enough money for your retirement years. An important step in this process? Studying your employer's retirement savings plan and then using that information to maximize the money you can save each year.
Defined benefits plans
If your employer offers a defined benefits plan, better known as a pension, you are in luck. You will not have to make many investment decisions. When you retire, those pension plan dollars will be waiting for you.
Under a defined benefits plan, your employer guarantees you a particular dollar amount during your retirement. Several factors impact the value, including your yearly compensation, the number of years that you've worked at the company and a fixed percentage rate calculated by your employer.
That is the good news. The bad news? The odds are high that your employer does not offer this option. Pension plans have grown rare as more companies require their workers to take the lead in saving for their retirements.
Your employer may also offer a retirement savings plan based on annuities. These programs come in several types. In general, annuities are defined benefit plans that provide fixed monthly payments that workers will start receiving once they retire.
A traditional annuity plan is the joint and 50 percent type. Under this plan, the retiree receives his or her benefits for life. After death, the retiree's spouse receives half the amount of the benefits until his or her death.
There is also the joint and 66 percent. This plan works much the same way as does the joint and 50 percent plan. Retirees receive their benefits until they die, and then their spouses receive two-thirds of the benefit until their death.
The joint and 100 percent plan, as you might have guessed, provides spouses with 100 percent of retirees' benefits after these retirees die.
The 10-year certain type of annuity is a bit more complicated. Under this plan, your benefits will be paid for life. However, if you die within the first ten years after retirement, your beneficiary collects the same dollar amount until that person reaches the 10th year of his or her retirement. At that time, all payments stop. If you die more than ten years after you retire, all payments stop after your death.
A life-only annuity plan, as its name suggests, pays out benefits only until you die. A lump-sum plan provides you with a chunk of cash that you can then invest or spend as you see fit.
Defined contribution plans
Some employers today offer their employees one of many types of defined contribution plans.
Under these plans, your employer will make a regular contribution to your retirement savings based on your salary and participation in the plan. Usually, your employer will be able to make a contribution equal to a maximum of 15 percent of your salary or $40,000, whichever is less.
Other companies offer a stock bonus plan. This plan operates similarly to the defined-contribution plan. However, instead of making monetary contributions to the plan, your employer will make a contribution in the form of company stock.
Under a money purchase pension plan, your employer will make a contribution each year that is fixed and mandatory. This contribution can be no more than 25 percent of your salary or $40,000, whichever is less.
Some companies will combine the profit-sharing and money purchase plans. Usually, companies that do this see earnings that vary widely from year to year. By going with a combined plan, they can make maximum contributions during years of strong revenue and lesser contributions during years in which revenue is down.
Your company might also offer an employee stock ownership plan, also known as an ESOP. Under this plan, your employer contributes to your shares of their stock. You can participate in such a plan if you work at least 1,000 hours a year for your employer.
401(k) and related plans
One of the more popular retirement savings plans today is the 401(k) plan. Under this type of plan, you'll contribute a percentage of each of your paychecks to your employer's retirement savings plan. This rate is usually left up to you, but in most cases you can contribute up to 15 percent of every paycheck to your retirement savings.
The primary benefit of such plans is that the money you invest in them is tax-deferred. This means that you will not pay taxes on them until you withdraw these dollars.
Another positive of a 401(k) plan? Your employer can elect to match all or a percentage of your contribution, something that can provide an extra boost to your retirement savings.
If you work for a non-profit company, you might have a chance to participate in a 403(b) plan. This plan works just like a 401(k) plan though it is designed specifically to meet the needs of non-profit companies.
All defined benefit plans and defined contribution plans offered by private companies are covered by the Employee Retirement Income Security Act (ERISA). ERISA is a federal law that sets minimum standards for most voluntarily established pension, retirement and health plans. Under ERISA, your employer is required to provide you with information about your plan. The act also gives you the right to sue your employer if you believe that it has breached its fiduciary duty in running its retirement savings plan.
Preparing for retirement
No matter what retirement plan your employer offers, the key for you is to participate in it and monitor its performance.
Remember, the earlier you start saving for your retirement years, the better off you'll be when you leave the workforce. Also, the more money you can stash away now, the more comfortably you'll be able to live after retirement. That is why it is important to invest as much money as you can from each paycheck in your retirement savings plans.
Secondly, don't forget to keep an eye on the performance of your investments, especially as you get closer to retirement age. You are not guaranteed any return on your investments when you retire. It is important, then, to move your investments around if you are not happy with the returns that they are generating.
If you have any questions or concerns about your company's retirement savings plan, schedule an appointment with your human-resources department. The odds are that it is your responsibility to maintain your retirement savings plan. Don't put it off.