Understanding Your Pension Plan

Pension plans are a major source of retirement income for Americans. Throughout your career, you should be knowledgeable about your pension plan to avoid mistakes and maximize the greatest return at retirement.

Your pension plan is funded by monthly contributions from you, your employer, and possibly a union. Usually the employer deducts your contribution from each paycheck. Through the years, the pension plan collects these contributions and invests them to make the fund grow. Upon retirement, you receive a regular pension benefit check, the amount based on the total contributions, number of years you contributed, and your annual income at retirement.

The federal Employee Retirement Income Security Act (ERISA) governs private pensions by setting legal minimums an employer's pension plan must provide. ERISA applies only to employees who have retired since 1975.

An employer is not required to offer a pension plan, but if offered, it must follow ERISA guidelines. You usually qualify to begin contributing to the employer's plan after working for at least one year.

You become vested in the pension plan after working for the employer a certain number of years. Once vested, you are eligible for pension benefits upon retirement. If you leave a job before becoming vested, you will receive only the money you contributed to the plan. However if you are vested, ERISA allows you to receive all of your vested benefits.

These funds may be rolled over into an Individual Retirement Account (IRA), possibly placed in the new employer's pension plan, or put in another plan. If the money is not placed in a pension or retirement program, the funds are subject to taxation since this is income to you.

Your employer cannot deprive you of your vested benefits if he switches pension plans or drops the plan altogether. He must meet the obligations of the previous plan.

Retiring before age 65 could affect your pension. You might not receive any benefits before turning 65, or your benefits might be reduced by a certain percentage if taken early.

Taking another job after retirement does not affect your pension. You may receive both Social Security and pension benefits, although some plans do reduce your benefit amount if you also receive Social Security.

ERISA guarantees your right to know basic information about your employer's pension plan, the benefits you expect to receive at retirement, and how the plan is investing its funds. Your employer should provide you with a summary of the plan and its performance annually.