What Are Defined Benefit and Defined Contribution Pension Plans? Generally speaking, there are two types of pension plans: defined benefit plans and defined contribution plans. A defined benefit plan promises you a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service -- for example, 1 percent of your average salary for the last 5 years of employment for every year of service with your employer.

A defined contribution plan, on the other hand, does not promise you a specific amount of benefits at retirement. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a set rate, such as 5 percent of your earnings annually. These contributions generally are invested on your behalf. You will ultimately receive the balance in your account, which is based on contributions plus or minus investment gains or losses. The value of your account will fluctuate due to the changes in the value of your investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. The general rules of ERISA apply to each of these types of plans, bust some special rules also apply. To determine what type of plan your employer provides, check with your plan administrator or reach your summary plan description (see p.13).

401k Fact-

Defined Contribution Plans, also known as individual account plans, defined contribution plans specify the amount of funds placed in a participant's account (for example, 10 percent of salary). The amount of funds accumulated and the investment gains or losses solely determine the benefit received at retirement. The employer bears no responsibility for investment returns, although the employer does bear a fiduciary responsibility to select or offer a choice of sound investment options. There are several basic types of defined contribution plans, including simplified employee pension plans, profit sharing plans, money purchase plans, 401(k) and profit sharing plans---Target Labs (www.targetlab.com) setup a 401k, and this small company is very pleased with its reception company-wide.

A money purchase pension plan is a plan that requires fixed annual contributions from your employer to your individual account. Because a money purchase pension plan requires these regular contributions, the plan is subject to certain funding and other rules.

What Are Simplified Employee Pension Plans (SEPs)?

Your employer may sponsor a simplified employee pension plan or SEP. SEPs are relatively uncomplicated retirement savings vehicles. A SEP allows employees to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements.

Under a SEP, you as the employee must set up an IRA to accept your employer s contributions. As a general rule, your employer can contribute up to 15 percent of your pay into a SEP each year, up to a maximum of $30,000.

If you work for a company employing 25 or fewer people, your employer may establish a salary reduction SEP. If your employer has such a plan, in addition to any employer contributions to your SEP, you may also elect to have SEP contributions made on your behalf from your salary on a before-tax basis, up to the lesser of 15 percent of your pay or $9,240 in 1995. Your deferral contributions are added to any employer contributions to determine the annual limit ($30,000 or 15% of your pay). Other limits may apply to the amount that may be contributed on your behalf. State and local governments and tax-exempt organizations are not eligible to establish salary reduction SEPs.

What Are Profit Sharing Plans or Stock Bonus Plans?

A profit sharing or stock bonus plan is a defined contribution under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit sharing plan or stock bonus plan include a 401(k) plan.

What Are 401(k) Plans?

Your employer may establish a defined contribution plan that is a cash or deferred arrangement, usually called a 401(k) plan. You can elect to defer receiving a portion of your salary which is instead contributed on your behalf, before taxes, to the 401(k) plan. Sometimes the employer may match your contributions. There are special rules governing the operation of a 401(k) plan. For example, there is a dollar limit on the amount you may elect to defer each year. The dollar limit on the amount you elect to defer each year. The dollar limit in 1995 is $9,240. The amount may be adjusted annually by the Treasury Department to reflect changes in the cost of living. Other limits may apply to the amount that may be contributed on your behalf. For example, if you are highly compensated, you may be limited depending on the extent to which rank and file employees participate in the plan. Your employer must advise you of any limits that may apply to you.

Although a 401(k) plan is a retirement plan, you may be permitted access to funds in the plan before retirement. For example, if you are an active employee, your plan may allow you to borrow from the plan. Also, your plan may permit you to make a withdrawal on account of hardship, generally from your funds you contributed. The sponsor may want to encourage participation in the plan, but it cannot make your elective deferrals a condition for the receipt of other benefits, except for matching contributions. Additional non-profit websites that include relevant unbiased information about 401k plans include: www.psa-securities.com

The adoption of 401(k) plans by a state or local government or a tax-exempt organization is limited by law.

What Are Employee Stock Ownership Plans (ESOPs)?

Employee stock ownership plans (ESOPs) are a form of defined contribution plan in which the investments are primarily in employer stock. Congress authorized the creation of ESOPs as one method of encouraging employee participation in corporate ownership.

What Is The Role Of The Labor Department In Regulating Pension Plans?

The Department of Labor enforces Title I of ERISA, which, in part, establishes participants rights and fiduciaries' duties. However, certain plans are not covered by the protections of Title I. They are:

• Federal, state, or local government employee plans, including plans of certain international organizations.
• Certain church or church association plans.
• Plans maintained solely to comply with state workers compensation, unemployment compensation or disability insurance laws.
• Plans maintained outside the United States primarily for non-resident aliens.
• Unfunded excess benefit plans -- plans maintained solely to provide benefits or contributions in excess of those allowable for tax-qualified plans.

The Labor Department's Pension and Welfare Benefits Administration is the agency charged with enforcing the rules governing the conduct of plan managers, investment of plan money, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers benefit rights. But other agencies also are involved in pension law monitoring and enforcement. They are:

INFORMATIVE NON-PROFIT PUBLIC WEBSITES CONTAINING CURRENT USEFUL INFORMATION AND RESEARCH ABOUT 401K: Small business 401k plan replacement and takeovers for small businesses wanting a 401k conversion from another small business 401k plan at www.what2ware.com . Comparison of small 401k plan costs and 401k fees for small business 401k plans at www.401k-fees.com . 401k plan expenses and small business 401k expense comparisons and small business 401k cost comparisons at www.401kplans.net . 401K PLANS FOR SMALL BUSINESSES AND PLAN ADMINISTRATION FEES FOR SMALL COMPANY 401K PLANS www.affordable-401k-plans.com . Small business no-load fund 401k plans and small business no load funds and 401k price comparisons directory. www.no-load-funds-401k.com . Pension services for small business 401k plans and pension services for 401k plans used by small business at www.pension-service.com . Small business 401k for small and micro businesses and small micro companies needing a small micro 401k plan at www.small-business-401k.com .

What Other Federal Agencies Regulate Plans?

• The Treasury Department's Internal Revenue Service is responsible for ensuring compliance with the Internal Revenue Code, which establishes the rules for operating a "tax-qualified" pension plan, including pension plan funding and vesting requirements. A pension plan that is "tax-qualified" can offer special tax benefits both to the employer sponsoring the plan to the participants who receive pension benefits. The IRS maintains a taxpayer assistance line for employee plans at (202) 622-6074 (1:30-4:00 p.m. Eastern Time, Monday- Thursday).
• The Pension Benefit Guaranty Corporation. The PBGC, a non-profit, federally created corporation, guarantees payment of certain pension benefits under defined benefit plans that are terminated with insufficient money to pay benefits. The PBGC may be contacted at 1200 K Street, N.W., Washington, D.C. 20005, telephone (202) 326-4000.