While all of these are good, the misuse of these funds is not uncommon hence the creation of the Employee Retirement Income Security Act of 1974 (ERISA).
The Act ensures that the employee pension benefit plan will be protected, and part of that protection is having a safety financial net in the form of an ERISA Bond.
The said bond ensures that the person who is handling the plan will be held accountable in case of fraud or dishonesty.
That’s a relief, right?
But here’s the big question: given the number of retirement plans, which ones are covered by an ERISA Bond?
That’s what we’re going to tell you today. Read on to find out!
DEFINED-BENEFIT PLAN
Also referred to as a traditional pension plan, a defined-benefit plan provides a specific amount to the employee upon retirement. This type of plan, which is funded by the employer, can provide the benefits in two ways:
- Fixed monthly amount (i.e. $800/month)
- The amount of benefit will be computed based on the employee’s age, tenure, and salary
The benefits in a defined-benefit plan are protected by federal insurance through the Pension Benefit Guaranty Corporation (PBGC).
DEFINED-CONTRIBUTION PLAN
A defined-contribution plan is the opposite of a defined-benefit plan. It doesn’t provide the employee with a fixed amount upon retirement. The amount can fluctuate depending on the value of the investment. Aside from that, it is funded by both the employer and the employee. Each one will contribute money to the account in the plan.
The employee can choose how much to contribute from their salaries through pretax deductions. The employer can then match that contribution. Upon retirement, the employee will see the amount of their contributions, how it’s invested, and any charges deducted.
SIMPLIFIED EMPLOYEE RETIREMENT PLANS (SEP)
As the name suggests, this type of plan simplifies the way employers contribute to their employees’ retirement plans. The contributions are sent to the employee’s Individual Retirement Accounts (IRAs).
401(k) PLAN
This is a type of a defined-contribution plan along with 403(b) plans. In this type of plan, the employers can contribute the same amount that the employees can choose to put in their accounts. The investments in this particular plan will only be taxed once the employee decides to withdraw the money.
Variations of the 401(k) plan such as SIMPLE 401(k) and Safe Harbor 401(k) require additional contribution from the employer. The employer must provide additional requirements as well.
PROFIT-SHARING PLANS
For this type of plan, which is also known as Stock Bonus Plans, employers can choose how much yearly contribution they can make based on the business’s profits. The contribution is provided either through cash or stock options. The employee’s 401(k) can be included in profit-sharing plans.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOP)
Just like the 401(k), an ESOP is a type of defined-contribution plan and is part of an employee’s remuneration package. In this case, the employer allows the employee to become shareholders of the company they are working for. The employer will put the shares in a trust fund that they’ve created.
