You may want to put off thinking about retirement until you are older, but planning for this time of life should really begin when you start working. There are federal laws to help you do this. One such law -- the Retirement Equity Act -- was passed by Congress in 1984 to address the inequities women faced when retirement planning. The REA amended the Employee Retirement Income Security Act of 1974, the federal law that generally regulates voluntary employer-provided retirement plans, or pension plans.
ERISA Governs Retirement Plans
ERISA establishes standards for retirement plans, including accountability, information dissemination, employee eligibility and vesting, or when you own your plan. Any money you contribute to your plan is always yours. However, money your employer contributes does not belong to you until your plan vests, at a pre-determined time, which is usually based on your years of service. Sometimes vesting is spread over a number of years, so a percentage of ownership of the plan occurs at periodic intervals. Retirement plans that comply with federal ERISA laws are called qualified plans.
Two Types of Retirement Plans
ERISA covers both defined-benefit and defined-contribution retirement plans. Under a defined-benefit plan, the employer contributes almost all of the funding for the plan, and at retirement, the employee receives a predetermined monthly amount, based on salary, years of service and age at retirement. Under a defined-contribution plan, employees and the employers contribute to a fund that is invested in various ways. At retirement, the benefit depends on years of service, contributions by the employee and employer, and investment performance. Examples of defined–contribution plans are 401(k) and Keogh retirement accounts.
REA: Time Off From Work
Originally, ERISA established two formulas to determine when plans would fully vest. Both provided that when an employee took an extended leave from work, such as for childrearing, she lost credit for all the pre-leave time for pension eligibility and vesting purposes. Passage of the REA created an additional formula that counts all years of service for eligibility and vesting purposes, even if they are not continuous. This formula protects employees who take time off for family and health reasons, or even to work for another employer, if they return to the original employer within five years.
REA: Survivor Benefits
Prior to 1984, women who relied on their husbands' retirement plans for support later in life were sometimes left with nothing if their husbands died prior to or during retirement, even if the pension had vested. The REA requires plans to offer a joint and survivor benefit for the surviving spouse of an employee who dies either before retiring or after retiring. The employee can refuse this additional benefit or change the beneficiary on the plan, but only with the written consent of his spouse.
It is common for married couples who divorce to divide up the rights to the working spouse’s retirement plan as part of the marital property settlement. But prior to 1984, they could not do this because of ERISA’s “spendthrift provision,” which was designed to prevent the assets in a retirement plan from being turned over to creditors. The REA provides that the spendthrift provision does not apply to domestic relations orders related to alimony, child support or marital property settlements.
For cost-saving reasons, today’s employers favor defined-contribution plans over defined-benefit plans. The REA does not, however, always offer the same protections to spouses for defined-contribution plans as for defined–benefit plans. For example, if an employee with a vested defined-benefit plan leaves his employer, the plan stays with the employer who will pay the pension benefits accrued, including joint and survivor benefits unless waived, when the employee reaches retirement age. In contrast, an employee with a vested direct-contribution plan who leaves the employer prior to retirement can take cash out or roll the plan over to another retirement plan, such as an individual retirement account without spousal consent because ERISA does not apply to most IRAs.