Qualified Retirement Plans
A test used to determine if any investment is proper for any plan is the
"amount of risk" involved in the investment.
ERISA
Employee Retirement Income Security Act
Qualified Plans v. IRAs:
It is important to note that while IRAs were created by ERISA, they are not defined as a "qualified plan" but are a different type of arrangement subject to specific rules which do not apply to qualified plans.
ERISA - Standards
Minimum standards are required for participation, vesting & providing promised benefits
ERISA - Remedies
Participants may pursue legal action for fiduciary breaches
ERISA - Guarantees
Payment of certain benefits is guaranteed through the Pension Benefit Guaranty Corporation
ERISA - Disclosure
Plans must regularly provide participants with important information about plan features & funding.
ERISA - Fiduciary Responsibility
contains fiduciary provisions to protect plans from mismanagement & misuse.
If the plan's guidelines allow it,
covered call writing & transactions in index options can be done.
ERISA - Investment Policy Statement -
is a written statement that provides plan fiduciaries who are responsible for investments with guidelines concerning investments & management decisions. ● ERISA interpretations have deemed the creation & maintenance of such a policy to be consistent with the fiduciary obligations required for qualified plans. ● Therefore, a fiduciary may be found to have breached their duties if they do not maintain an investment policy statement.
Qualified Plans - Defined Benefit Plans - Example:
A plan may dictate that when an employee retires, they will receive 5% of their average salary for the last 3 years for the number of years they worked for the employer.
A Fiduciary is defined as
anyone who has the power to exercise discretionary authority or control over a plan's management or assets or who is paid a fee or any form of compensation for investment advisory services.
Categories of Qualified Plans - There are 2 categories of qualified plans.
● Defined Benefit Plans ● Defined Contribution Plans
ERISA - Rules imposed on qualified retirement plans includes:
● Disclosure ● Standards ● Accountability ● Remedies ● Guarantees
Fiduciary responsibility & accountability is required.
● Fiduciaries must act solely in the interest of the plan participants & beneficiaries using care, skill, prudence & diligence. ● Those who violate conduct rules may be held liable for losses to the plan.
Employee Retirement Income Security Act [ERISA] -
● enacted in 1974 to protect the retirement assets of participation in private sector employee benefit plans. ● created standards & rules that plans & plan fiduciaries [managers] must follow in the administration of "qualified plans." ● Does not compel employers to offer pension plans or require that a plan provided a minimum level of benefits. ● Instead, the act imposes federal standards for plans once they have been established.
ERISA - Accountability
Fiduciaries are required to be accountable.
ERISA - A Fiduciary SHALL NOT
cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect: ● sale, exchange or leasing of property between a pension plan & a party in interest. ● lending of money or other extension of credit between a pension plan & a party in interest. ● furnishing of goods, services or facilities between a pension plan & a party in interest ● transfer to or use by or for the benefit of, a party in interest, of any assets of a pension plan. ● acquisition, on behalf of a pension plan, of any employer security or employer real property unless ERISA requirements are met.
Qualified Retirement Plans - Overview
is a retirement plan established & maintained by a private employer that meets the requirements of the Employee Retirement Income Security Act [ERISA]. ●Are designed to provide retirement benefits for employees & are eligible for significant tax benefits. ●Examples: 401(k) plans & profit-sharing plans
Qualified Retirement Plans - The primary tax benefits are: ● Employer is entitled to current tax deductions for their plan contributions. ● Employees do not have t pay current income taxes on plan contributions.
● Earnings in the plan are tax-deferred until received by the employee or their beneficiary. ● Taxes are paid only when funds are distributed, usually at retirement when the taxpayer is in a lower tax bracket.
When establishing a tax-advantaged retirement plan, private employers may choose either a qualified or IRA-based plan.
● The choice usually comes down to the difference in contribution limits & the level of effort involved in administering the plan. ● Qualified plans generally have higher contribution limits but require more complex administration than IRA plans.
ERISA - Prohibited Transactions / Fiduciaries of a plan SHALL NOT
● deal with the assets of the plan inits own interest or for its own account. ● act in any transaction involving the plan on behalf of a party whose interests are adverse to the interests of the plan, its participants, or its beneficiaries. C receive any consideration for its own personal account from any party dealing in connection with a transaction involving the assets of the plan.
Qualified Plans - Defined Contribution Plans -
● employees or the employer [or both] make contributions to employees' individual accounts. ● Employers may make matching & profit sharing contributions to employee's account as well which are fixed by a predetermined formula. ● Unlike a Defined Benefit Plan, the retirement benefit cannot be calculated in advance but depends upon the amount of contributions & the performance of investments in the account.
Qualified Plans - Defined Benefit Plans -
● the benefits received by employees are computed using a predetermined formula. ● Benefits are calculated based upon compensation, years of service & age. ● High salaried employees near retirement benefit the most. Benefits are taxable as ordinary income. ● An Actuary regularly reviews contribution amounts to ensure the fund will meet future benefit payment obligations.
