Pension Plan Basics
Employer-sponsored defined benefit plans can be generous to the employee upon retirement, depending on how the plan is structured, how long the employee works for the company, and for what salary. One thing most defined benefit plans usually do not provide, however, is for withdrawing funds before you actually retire.
You need to read the terms of your plan carefully if you’re working for a company with a defined benefit plan. If you stay until retirement, you may receive a nice lump sum or even a guaranteed monthly payment, but if you leave early or switch jobs, you may not have access to those funds. If you haven’t worked for the firm long enough, you may even be locked out.
A defined contribution plan, however, is fully under your control, but it comes with no guarantees of how much money will be there when you retire. That depends on where you direct the investment of your contributions, which are withdrawn from your paycheck and sent to the company managing your 401(k), 403(k), or similar plan.
The Employee Retirement Income Security Act
As the retirement landscape began changing from defined benefit to defined contribution plans, the federal government enacted the Employee Retirement Income Security Act (ERISA) in 1974. ERISA established several protections for workers participating in pension and health plans:
- Requiring plans to provide participants with a summary of benefits
- Setting minimum standards for participation, vesting, benefit accrual, and funding
- Establishing fiduciary responsibilities on plan sponsors
- Requiring plans to establish a grievance and appeals process for participants to get benefits from their plans
- Giving participants the right to sue for benefits and breaches of fiduciary duty
- Guaranteeing payment through the Pension Benefits Guaranty Corporation (PBGC) if a defined benefit plan is terminated
Filing a Pension Claim
If you’re a participant in a defined benefit plan, your plan sponsor will establish requirements for filing a claim for benefits. These requirements must be spelled out in a Summary Plan Document (SPD), as required by ERISA. Your plan might say, for example, that you must have worked a certain number of years and/or be a certain age before you can start receiving benefits. It will also spell out the forms and documents you need to submit.
If you’re participating in a 401(k) or other defined contribution plan at work, you also must be given a Summary Plan Document, which will cover how you can transfer your accumulated savings into another company’s plan if you’re switching jobs, or into an IRA if you’re retiring or moving on.
Denial of Claims and the Appeals Process
When you file a claim, your plan has 90 days to make a decision, but it can extend the period by an additional 90 days. If you file a claim and it’s denied, ERISA mandates that you be given a plain-language explanation for the denial. For instance, you didn’t meet the age or years-worked requirement.
ERISA also allows you to file an appeal. The plan has 60 days to review the appeal but again can extend the period by an additional 60 days. If your appeal is rejected, you must be given a plain-language explanation. Denials of appeals can be referred to the Employee Benefits Security Administration (EBSA), but a better – or even concurrent – option is to seek the advice of an experienced attorney and explore your legal options.