Employer-Sponsored Retirement Plans

Next to your health, the well-being of your financial future is probably highest on your list of concerns for you and family members. Of all financial needs, retirement, due to its elusive definition and future occurrence in time for most working individuals, has become a real challenge for many in the U.S to properly save and prepare for. And so, many employers offer some type of, or a combination of, retirement plans and will usually partner with one of the various financial institutions and investment firms available to support them in providing this benefit for their employees.

Today, retirement plans can come in several different “flavors,” and they fall into three main categories:

• Pension Plans
• Profit Sharing Plans
• Employer Sponsored Savings Plans, such as 401(k), 403(b), and 457 

Here’s a quick breakdown of the more common types of plans available.

Pension Plans

Pension Plans can come in a couple of different forms.

Traditional Pension Plans

There are plans set up so the employer says, “When you retire, I will pay you $X each year.” Then, each year, the employer puts in enough money to make sure that there will be enough in the kitty to fulfill the promise. The amount that they have to put into the plan will fluctuate as the workforce changes.    

Cash Balance Plans

Another type of plan (and more common today) is the type of pension where the employer says, “I will put $X (or percent of your income) into a pension plan and when you retire, we’ll see how much is in the kitty and then you can generate an income from that amount.”   

Profit Sharing Plans

Profit-sharing plans are the type of plan where the employer puts in a percentage toward your account; however, the employer doesn’t have to make a contribution to the plan if they didn’t make a profit that year.

Companies who provide pension plans commonly use a combination of a pension plan that requires a contribution and a profit sharing plan that lets them contribute more when business is good.

Employer Sponsored Savings Plans

Employer sponsored plans are a means of stashing some serious money away for retirement. Generally, you can save more through an employer-sponsored plan than you may be able to on your own. 

• You decide how much to contribute up to the IRS limit and how the money is invested within the options available on the plan 
• Your employer automatically takes contributions from your paycheck before tax is figured. As a result, your overall income tax is calculated on a lower amount than it was before you were making contributions, making your total income tax burden a little lighter. 
• Some employers match employee contributions. So for those people not participating in these plans, they are literally walking away from free retirement money.
• Some plans also include a loan feature letting you borrow your retirement funds and then pay yourself back without incurring tax penalties. (as long as you pay it back within the IRS rules) 
• You pay no income tax on contributions or any earnings on your account until money is withdrawn.

401(k) Plans 

Probably the best-known type of employer sponsored savings plan, the 401(k) plan lets you set aside a portion of your income on a pre-tax basis and then invest that money for your retirement. Additional legislature made in 2006 allows employers to also offer Roth 401(k) contributions, to provide after-tax contributions with tax-deferred interest potential. Many employers then match some portion of the amount you put into the plan. Any size employer can have a 401(k) as well as governmental and tax-exempt employers.

401(a) Plans

Like a 401(k) plan, this type of plan requires the employee to manage the decision of which investments the contributions are made to, but the money comes only from employer contributions, not from the employee.  Employers also set the eligibility and vesting rules within the plan. Employers often use these plans as an incentive to retain key employees. Other plan rules for tax-treatment, withdrawal and loans can be similar to that of a 401(k) plan.

403(b) Tax Deferred Annuity Plans

Similar to the 401(k), employees contribute part of their salary on a pre-tax basis to the plan and the employer may match part, all, or none of that amount. However, 403(b) tax deferred annuities are not available to all types of employers. Only tax-exempt 501(c)(3) employers, such as, educational organizations, churches, tax-exempt hospitals, schools, or charities are eligible.

Section 457 Deferred Compensation Plans

Under a Section 457 plan, employees may contribute a portion of their salary on a pre-tax basis into a deferred compensation plan for retirement. However, these plans are restricted to state, county, and municipal government workers or, if the employer is tax-exempt, to select management and highly compensated employees. These plans have some different provisions than 401(k) plans, including special catch-up contributions, earlier qualified withdrawals and limitations on plan loans.

Deferred Compensation Plans

Post-retirement Health Reimbursement Arrangement

Government employers can also sponsor Health Reimbursement Arrangements (HRA) and prefund their Other Post Employment Benefits (OPEB) liabilities. The HRA plan can be funded through a Voluntary Employment Benefit Association (VEBA) or 115 Integral Trust, allowing employees to receive tax-free reimbursement for the cost of medical insurance premiums and eligible out-of-pocket medical expenses for them and their eligible dependents.

Retirement plans and working toward a secure future

For many working individuals here in the U.S., the primary source of retirement income will be what they’ve saved in their employers' 401(k), 401(a), 403(b) or 457 plans. Current statistics show many are not saving enough to retire with an income to sustain their current way of life throughout their life in retirement. If you are eligible to participate in your employer-sponsored retirement plan, learn about the importance of saving and investing to meet your retirement objectives, and stay focused on the effort as you progress throughout your career toward your retirement.

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