Guides / Life Events

Your Pension: What You're Entitled To

Federal law, mainly ERISA, sets real floors on what an employer-sponsored retirement plan must guarantee you. Knowing those floors helps you read your own plan documents with a much sharper eye.

What ERISA actually guarantees

The Employee Retirement Income Security Act (ERISA) doesn't require any employer to offer a pension plan, and it doesn't dictate how generous a plan has to be. What it does require is that if a plan exists, it meets minimum standards: clear disclosure to participants, floors on participation and vesting timelines, funding requirements so promised money is actually there, accountability for the fiduciaries managing plan assets, and your right to sue if any of that breaks down.

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Defined benefit vs. defined contribution plans

A defined benefit plan, the traditional pension, promises a specific monthly benefit at retirement, often calculated from salary and years of service. Your payout depends on the formula, not on how the underlying investments performed.

A defined contribution plan instead promises a contribution rate, not an outcome; you (and often your employer) contribute to an individual account, and your eventual balance reflects contributions plus or minus investment performance. Common variations include the 401(k), SEP, profit-sharing and stock bonus plans, SIMPLE plans, and ESOPs. Check with your plan administrator or your summary plan description to confirm which type covers you.

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What information your plan must give you

Your plan administrator must automatically provide a summary plan description (SPD), explaining when you begin participating, how benefits are calculated, when they vest, and how to file a claim, and a summary annual report, both at no cost. If a plan changes, you must be notified through a revised SPD or a summary of material modifications. If you can't get these documents directly, the Department of Labor's Public Disclosure Room can provide copies for a nominal fee.

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Vesting: earning a non-forfeitable right

Vesting is the point at which your accrued benefit becomes yours outright, even if you leave the company. You're always 100 percent vested in your own contributions; your employer's contributions vest according to a schedule that must meet ERISA's minimums (many plans are more generous). Reaching normal retirement age while still employed generally means full vesting regardless of the schedule. A short break in service, generally under five consecutive years, cannot cause forfeiture of benefits you've already earned.

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When and how benefits get paid

ERISA sets an outer limit on when payments must begin, generally within 60 days of the plan year in which you turn 65 (or the plan's normal retirement age), reach 10 years of participation, or terminate service, whichever comes last. Most tax-qualified plans require you to begin taking distributions by April 1 of the year after you turn 72, unless you're still working and own 5 percent or less of the business. Defined benefit and money purchase plans generally must offer payment as a life annuity; defined contribution plans have more flexibility in the form of payout they offer.

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What your spouse is entitled to

If you're covered by a defined benefit or money purchase plan, your plan must offer a qualified joint and survivor annuity (QJSA), guaranteeing your spouse continued payments (at least 50 percent, up to 100 percent, of your own) if you die first, unless you both waive it in writing with notarized spousal consent. A qualified preretirement survivor annuity (QPSA) provides similar protection if a vested, married participant dies before benefits begin. In most defined contribution plans like 401(k)s, your spouse is automatically presumed to be your beneficiary unless they consent in writing to someone else.

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Making a claim, and what happens if it is denied

Every plan must have a written claims procedure. If your claim is denied, the plan generally must notify you in writing within 90 days, explaining why and citing the specific plan provisions. You must be given at least 60 days to appeal, and the plan generally must rule on that appeal within another 60 days. Courts typically require you to exhaust this internal process before filing a lawsuit.

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Plan funding, termination, and PBGC protection

Minimum funding rules apply to defined benefit and money purchase plans, and employers who fail to meet them face an excise tax regardless of whether the shortfall was intentional. If a defined benefit plan terminates, your accrued benefit becomes 100 percent vested to the extent then funded, and if the plan is insured by the Pension Benefit Guaranty Corporation (PBGC), your vested benefits are guaranteed up to statutory limits even if the plan runs short.

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Divorce and qualified domestic relations orders

Your pension generally can't be reached by creditors, with narrow exceptions for IRS tax claims and family support obligations. A state court can award part of your pension to a spouse, former spouse, or dependent through a qualified domestic relations order (QDRO), which your plan is required to honor once it meets ERISA's specific requirements. If you're going through a divorce, make sure any QDRO addresses what happens to the benefit if either party dies before payments begin.

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Frequently asked questions

What's the main practical difference between a defined benefit and defined contribution plan?

A defined benefit plan promises a specific payout formula regardless of investment performance. A defined contribution plan promises a contribution rate, and your eventual balance depends on how those contributions perform over time.

What documents am I entitled to receive from my plan for free?

The summary plan description and the summary annual report must be provided automatically at no cost. You can also request the full annual report for a copying fee if you want more detail.

Can my ex-spouse get part of my pension in a divorce?

Yes, through a qualified domestic relations order (QDRO) issued by a state court, provided it meets ERISA's specific requirements. Your plan is legally required to honor a valid QDRO.

This guide is for general informational purposes only and is not tax, legal, financial, or investment advice. Every business situation is different, so consult a licensed professional before making decisions based on this content.