► Defined Benefit vs Defined Contribution Retirement Plans
The Employee Retirement Income Security Act of 1974 - ERISA - is the statute regulating the retirement plans of millions of American workers. ERISA sets minimum standards for pension plans in the private sector, including how long an employee must work before being allowed to participate, how long they must work before they have a non-forfeitable interest in their pension, how long a participant can be away from their job before benefits are affected, and whether spouses have a right to part of a pension in the event of death.
There are two main types of pensions: defined benefit plans and defined contribution plans. Defined Benefit plan provides participants with a specified monthly benefit at retirement, generally calculated using a formula based on salary and length of service.The employer assumes responsibility for ensuring sufficient funds are available to issue monthly checks to those entitled, as well as making payments to spouses for members whose plans include survivor's benefits.
WithDefined Contribution plans, such as 401(k)s, retirees are entitled to receive whatever funds have been contributed in their names, by themselves and/or their employers, plus any accrued interest, dividends or capital gains.
► Eligibility Requirements for Defined Benefit Pensions
Eligibility for retirement benefits is determined by whether an individual is vested or not. Vesting is the point at which a participant's entitlement is secure, and is usually based on length of service.Prior to the mid-1970s, most private pension plans required 20 years before vesting occurred. The average time period decreased to about 10 years in the mid-80s, and currently stands at about 5 years.
Every private pension plan's rules of eligibility are contained in a Summary Plan Description (SPD), which is given to workers when they join. SPDs have been required since 1974, with passage of the ERISA.
Pension plan administrators are often unable to locate lost employees or missing beneficiaries who have moved or changed name over the years. And companies owing unclaimed pension benefits may have moved, change name or merged, making them difficult to find.
Due to the long term nature of this type of investment, each year large numbers of workers and heirs - who may not be aware of a deceased family member's pension - fail to claim accounts to which they're entitled.
Because many defined-benefit private pension plans are federally insured - even if a company dissolved or went bankrupt - it's possible to receive unclaimed benefits.
The Pension Benefit Guaranty Corporation (PBGC) is the federal agency responsible for the regulation of private pension plans. It currently guarantees payment of basic pension benefits earned by about 44 million American workers and retirees participating in over 35,000 private-sector defined benefit pension plans. Currently over $300 million is available for claim.
► Unclaimed Pension Benefit Search
There are many possible scenarios that must be considered when searching for unclaimed pension benefits owed by an employer no longer in business. The company could have reorganized under a new name, been acquired, or dissolved, and the plan transferred or terminated. If terminated, fully funded plans may have been replaced by an insurance company annuity, transferred to a bank or mutual fund administrator, or turned over to the PBGC.
Documents that will help locate retirees and heirs claim benefits include the vesting notification, annual individual benefit statement, plan exit letter, and the Summary Plan Description. Pension plan annual reports are required to be filed annually by the plan administrator and reported to Pension and Welfare Benefit Administration (PWBA) on IRS Form 5500. If the employed was a union member, membership documents may contain valuable pension information; contact the AFL-CIO office for assistance.
► Unclaimed Benefits from Terminated Pension Plans
In a distressed termination, where an employer ends a plan that does not have the funds available to pay all benefits due, PBGC assumes the role of trustee and ensures plan participants receive their pension benefits, up to a current maximum of $59,320 annually.
For those who know their retirement plan was terminated, The Retirement Protection Act of 1994 created the Missing Participant Program, which charges PBGC with paying the benefits due from an insurance fund for employees of private companies whose underfunded pension plans have been terminated. Up to three years of back payments will be made.
The PBGC's Trusteed Plan database will show if the PBGC is responsible for paying benefits of a failed company. The Missing Participant database provides names and last-known addresses of workers who have pension money coming from terminated defined benefit pension plans, plans that were either closed by former sponsors who distributed the benefits, or taken over by PBGC because they lacked enough money to pay benefits.
Note: This database does not contain every unclaimed account. It covers individuals owed benefits from defined benefit plans that were terminated after July 1, 1974. Plan sponsors must have been private companies that were not religious organizations or professional offices (i.e. lawyers, doctors) with fewer than 26 employees.
Also, PBGC cannot assist in instances where the plan was administered by a government agency or paid for by union dues. If it was a union plan, contact the local AFL-CIO office for assistance.