Submitted by: Derek Fiorenza CPFA, C(k)P®, AIF®, PPC™, MSBA, COO/CC, Summit Group Retirement Planners, Inc. – A CEFEX Certified Advisory Firm

What is ERISA?  What is a qualified retirement plan?  What types of retirement plans exist?  What are the differences between them?  As employers, when you decide to offer a retirement plan, you are doing so because you want to assist your employees in preparing for their future by creating a retirement program that helps drive optimal results.  Understanding the differences between these programs is important from a fiscal and moral standpoint for all employers to best support their employees.

ERISA

The Employee Retirement Income Security Act (ERSIA) is a federal law enacted in 1974 setting standards of protection for individuals in most voluntarily established private-sector retirement plans (US DOL Website).  There are two major types of qualified retirement plans, defined benefit plans and defined contribution plans.

Qualified Retirement Plan

Defined benefit plans which are directed by the employer, are designed to provide a specified monthly benefit at retirement.  Defined contribution plans do not promise a specific benefit at retirement, instead they put the onus on the participants to contribute money into their own account.  There are options for employers to contribute as well in this scenario through employer matches, and profit sharing arrangements.  Defined contribution plans are referred to as participant directed because the participant determines the allocation mixture and frequency of contributions.

Types of Retirement Plans

There are different types of defined contribution plans: 401(k) Plans, Profit sharing plans, Employee Stock Ownership Plans (ESOPS), Simplified employee Pension Plans (SEPs), and Savings Incentive Match Plans for Employees of Small employers (SIMPLEs) (US DOL Website).

Differences between Retirement Plans

401(k) Plans – employees can make contributions from their paycheck on a before tax basis (traditional), or a post-tax basis (Roth).  In order to comply with 404(c) compliance (an ERISA code section that attests to the fact the retirement plan is participant directed and the participants have access to different investment strategies; at least 1 stock option, 1 bond option, and a money market investment option), participants have the choice of allocating their contributions into the investment strategies they desire.

Several popular options that can be implemented to accomplish different goals are automatic enrollment (to increase participation by automatically enrolling participants into the plan), traditional and Roth (for tax treatment of contributions ente