by Robert D. Gary and Jori Bloom Naegele Protecting Your Pension FOR DUMmIES ‰ 01_102138 ffirs.qxp 6/21/07 6:47 PM Page i Protecting Your Pension For Dummies ® Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2007 by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing, Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax 317-572-4355, or online at http:// www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book. LIMIT OF LIABILITY/DISCLAIMER OF W ARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REP- RESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CRE- ATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CON- TAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZATION OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FUR- THER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFOR- MATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ. NOTICE TO READERS Applicability of the legal principles discussed in this book may vary substantially in specific situations. The information contained herein should not be construed as individual legal advice. IRS CIRCULAR 230 DISCLOSURE To ensure compliance with the requirements imposed by IRS Circular 230, we inform you that any tax advice contained herein does not deal with a taxpayer’s particular circumstances and is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should consult their own tax advisors regarding the tax consequences to them of their own particular circumstances. For general information on our other products and services, please contact our Customer Care Department within the U.S. at 800-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002. For technical support, please visit www.wiley.com/techsupport. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Control Number: 2007926408 ISBN: 978-0-470-10213-8 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 01_102138 ffirs.qxp 6/21/07 6:47 PM Page ii About the Authors Robert D. Gary and Jori Bloom Naegele first began representing pensioners in 1986. Since that time, they and their law firm, Gary, Naegele & Theado, LLC, located in Lorain, Ohio, have represented more than ten thousand pension- ers. Most of these claims were handled through class action lawsuits where pensioners across the country sought recovery from their respective pension plans for underpayments of their pension benefits. These cases have returned tens of millions of dollars that the retirees should have received when they first retired. Their pension class actions have resulted in decisions establishing important legal precedents benefiting pensioners nationwide. Bob has a JD from Case Western Reserve University School of Law and an LLM from New York University School of Law. He has been in private practice for the last 25-plus years. He started his legal career in the United States Department of Justice in the Organized Crime and Racketeering Section, where he got his first taste of how vulnerable pensions can be to manipula- tion. He was a Special Assistant to the Governor of Ohio as well as an Assistant County Prosecutor. He has been recognized throughout the years, having received a United States Department of Justice Special Achievement Award for sustained superior performance, a personal commendation from the Director of the FBI for trial performance, a proclamation from the Ohio Office of the Governor recognizing him as an outstanding citizen of Ohio, and special recognition from the Ohio General Assembly for a unique class action settlement that resulted in the distribution of free food to a million needy families in Northern Ohio. He has lectured and published articles in legal publications on class action–related topics. Jori received her JD from Case Western Reserve University School of Law in 1979, and she’s been an advocate of retirement issues for most of her legal career. In addition to representing pensioners, she’s also advocated on behalf of all employees, helping to secure not only retirement benefits but safer and hostile-free workplace environments. She has donated her time and skill to helping seniors and others through her pro bono work and has been actively involved in her professional community as well. She has served as the presi- dent of her local bar association, as a mediator for the Equal Employment Opportunity Commission (EEOC) and state and federal court, and has pub- lished articles and lectured on a variety of legal topics. She was appointed by a former Ohio Attorney General to its office’s Ethics and Professional Responsibility Advisory Counsel and was recognized for her service on the Ohio Supreme Court’s Task Force on Gender Fairness. 01_102138 ffirs.qxp 6/21/07 6:47 PM Page iii Over the years, Bob and Jori’s experience has shown them repeatedly that there is a wide gap between the knowledge of those who administer pension plans and those who depend on them for their financial security. Attempting to close that gap was the inspiration for this book. They realized that if ever there was a time for a book on planning for and protecting retirement bene- fits, it is now because the Pension Protection Act of 2006 has turned the gap of information into a chasm. It’s their hope that with this book pensioners will be better equipped to deal with the rules regarding their own pensions and be able to ask the right questions of the professionals, whether they be attorneys, accountants, or financial advisors. Bob and Jori have practiced law together for almost 25 years. They invite you to visit their firm’s Web site at www.gntlaw.com or e-mail them at office@ gntlaw.com. Gary, Naegele & Theado, LLC is located at 446 Broadway, Lorain, Ohio 44052, and the phone number is 440-244-4809. 01_102138 ffirs.qxp 6/21/07 6:47 PM Page iv Dedication Bob: I was laboring over some ERISA rules when my nine-year-old grandson Asher sat down next to me and read what I was writing. In Asher’s best dead- pan, he said, “I have to get this book.” This book is dedicated to a special group of future pensioners who have yet to enter the workforce — my grand- children, Asher, Andrew, and Olivia Belle — with the expectation that at some time they will read some future edition of this book. Jori: This book is dedicated to my children, Michael and Sydney, with the hope that they’ll one day soon be a part of the working world, that they’ll love their work, and that they’ll be armed with the right balance of knowl- edge, information, and compassion to make the right choices in life. Authors’ Acknowledgments Our thanks goes to all those at Wiley Publishing, Inc., who allowed us to share our vision of this book and who helped make this project a reality. First of all, we’d like to thank our friend Roy Kaufman, one of Wiley’s talented attorneys, whose advice and direction helped give birth to the proposal of this For Dummies book. Special thanks to Acquisitions Editor Lindsay Lefevere, whose ideas, suggestions, and guidance were always helpful and insightful, and to Project Editor Georgette Beatty, who shepherded us through the writing process and always kept us on task. Thanks also to Copy Editors Jessica Smith and Vicki Adang for their fine editing and to University of Alabama School of Law profes- sor Norman Stein, our technical reviewer. Our sincere thanks to Composition Services and to everyone at Wiley for their roles in getting this book to press. In addition to the folks at Wiley, we’d also like to extend thanks to Aileen Fonda, our secretary at Gary, Naegele & Theado, LLC, for all her help with this book and to the rest of our office as well, for making sure our office con- tinued to function during our occasional and not-so-occasional absences. To our family and friends, thanks for your support throughout this project. We know you’re as excited as we are to see this book come to fruition. We’d especially like to thank Jori’s husband, attorney Richard Naegele, a Fellow of the American College of Employee Benefits Counsel and pension-guru extraor- dinaire, for spending countless hours with us reviewing text, sharing his wisdom, and debating the finer points of pension law. Dick’s pension expertise, including teaching hundreds of pension seminars, drafting of plan documents, and author- ing numerous articles for pension and tax journals, enabled him to help us zero in on the really important stuff, and we are grateful for all his assistance. It also made for some interesting and lively conversations at the dinner table, and Jori is truly appreciative of Dick’s patience and support for going above and beyond. Bob extends his gratitude and appreciation to his wife, Karen, whose gentle prodding and encouragement kept him on schedule and anchored. 01_102138 ffirs.qxp 6/21/07 6:47 PM Page v Publisher’s Acknowledgments We’re proud of this book; please send us your comments through our Dummies online registration form located at www.dummies.com/register/. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Media Development Project Editor: Georgette Beatty Acquisitions Editor: Lindsay Lefevere Copy Editor: Jessica Smith Technical Editor: Norman Stein Editorial Manager: Michelle Hacker Editorial Assistants: Erin Calligan Mooney, Joe Niesen, Leeann Harney Cartoons: Rich Tennant (www.the5thwave.com) Composition Services Project Coordinator: Lynsey Osborn Layout and Graphics: Brooke Graczyk, Denny Hager, Stephanie D. Jumper, Barbara Moore, Laura Pence, Heather Ryan, Alicia B. South, Christine Williams Anniversary Logo Design: Richard Pacifico Proofreaders: Aptara, Dwight Ramsey Indexer: Aptara Special Help Victoria M. Adang Publishing and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Joyce Pepple, Acquisitions Director, Consumer Dummies Kristin A. Cocks, Product Development Director, Consumer Dummies Michael Spring, Vice President and Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General User Composition Services Gerry Fahey, Vice President of Production Services Debbie Stailey, Director of Composition Services 01_102138 ffirs.qxp 6/21/07 6:47 PM Page vi Contents at a Glance Introduction 1 Part I: Focusing on Pension Fundamentals 7 Chapter 1: Navigating the Ins and Outs of Pensions 9 Chapter 2: Acquainting Yourself with Pension Rules 25 Chapter 3: Exploring the World of Tax-Qualified Plans 39 Chapter 4: Using 401(k) Plans to Your Advantage 55 Chapter 5: Increasing Your Income with IRAs 69 Chapter 6: Monitoring the Investments in Your Pension 85 Part II: Making Sure That You Receive the Pension You Earned 103 Chapter 7: Getting the Scoop on Eligibility, Accrual, and Vesting 105 Chapter 8: Planning for Retirement While You’re Still Working 117 Chapter 9: Understanding the Rules of Pension Distributions 133 Part III: Guarding Your Pension from Your Employer 151 Chapter 10: Zeroing In on Fiduciaries 153 Chapter 11: Dealing with Your Employer’s Corporate and Financial Changes 165 Chapter 12: Handling Plan Modifications and Terminations 175 Part IV: Shielding Your Pension from Life’s Ups and Downs 187 Chapter 13: Hitting Yourself Up for a Loan 189 Chapter 14: Surveying Survivorship Benefits 201 Chapter 15: Dividing Your Pension between You and Your Ex 215 Chapter 16: Protecting Your Retirement Funds from Creditors and Bankruptcy 229 Part V: Taking Action When Bad Things Happen to Good Pensioners 235 Chapter 17: Looking Out for Potential Distribution Problems 237 Chapter 18: Tackling Denied Claims 251 Chapter 19: Hiring and Working with an Attorney 257 Chapter 20: Dissecting a Pension Lawsuit 277 02_102138 ftoc.qxp 6/21/07 6:51 PM Page vii Part VI: The Part of Tens 297 Chapter 21: Ten Key Pension Issues for People Still Working 299 Chapter 22: Ten Key Pension Issues for People Getting Ready to Retire 305 Chapter 23: Ten Key Pension Tips for Small Business Owners 313 Part VII: Appendixes 321 Appendix A: Glossary 323 Appendix B: Tables and Charts 333 Index 345 02_102138 ftoc.qxp 6/21/07 6:51 PM Page viii Table of Contents Introduction 1 About This Book 1 Conventions Used in This Book 2 What You’re Not to Read 3 Foolish Assumptions 3 How This Book Is Organized 3 Part I: Focusing on Pension Fundamentals 3 Part II: Making Sure That You Receive the Pension You Earned 4 Part III: Guarding Your Pension from Your Employer 4 Part IV: Shielding Your Pension from Life’s Ups and Downs 4 Part V: Taking Action When Bad Things Happen to Good Pensioners 5 Part VI: The Part of Tens 5 Part VII: Appendixes 5 Icons Used in This Book 5 Where to Go from Here 6 Part I: Focusing on Pension Fundamentals 7 Chapter 1: Navigating the Ins and Outs of Pensions . . . . . . . . . . . . . . . .9 Checking Out Pension Rules 10 Getting a Grip on Tax-Qualified Plans 10 Building your pension with defined contribution plans 11 Receiving cash for life with defined benefit plans 11 Moving Forward with 401(k) Plans 12 Funding Your Retirement with the Help of IRAs 12 Tracking Pension Investments 13 Ensuring That You Get Your Pension 14 Getting the skinny on eligibility, accrual, and vesting 14 Making retirement planning a priority 14 Receiving your pension distribution 15 Keeping Your Pension Safe from Your Employer 16 Watching your fiduciary 16 Understanding the impact of acquisitions, mergers, and other major job changes 17 Knowing what happens if your plan is changed or terminated 18 Safeguarding Your Pension from Life’s Trials 19 Getting a loan from yourself 19 Protecting your family 20 Watching out for your ex 21 Staying safe from creditors and personal bankruptcy 21 02_102138 ftoc.qxp 6/21/07 6:51 PM Page ix Taking Action When Necessary 22 Eyeing potential distribution problems 22 Filing your claim and appealing a denial 23 Hiring a lawyer 23 Litigating a pension claim 23 Chapter 2: Acquainting Yourself with Pension Rules . . . . . . . . . . . . . .25 Before You Begin: Basic Information for Understanding ERISA 26 Simple (yet important) definitions 26 The meaning of “tax-qualified plan” 28 An overview of pension plans covered by ERISA 29 Gotta Do It: ERISA’s Requirements for Pension Plans 30 Disclosing certain plan information 30 Setting minimum standards for participation, accrual, and vesting 32 Spelling out fiduciary obligations 33 Providing the right to file suit 34 Federally enforcing pension rights 36 Chapter 3: Exploring the World of Tax-Qualified Plans . . . . . . . . . . . .39 You Get What You Give: Defined Contribution Plans 39 Beginning with basics on benefits, contributions, and limitations 40 Surveying different defined contribution plans 42 Benefits from the Boss: Defined Benefit Plans 46 Looking at benefits, contributions, and limitations 47 Checking out different defined benefit plans 47 Something Special: Other Retirement Plans 52 Section 403(b) plans 53 Section 457 plans 53 Chapter 4: Using 401(k) Plans to Your Advantage . . . . . . . . . . . . . . . . .55 Understanding the Benefits of 401(k) Plans 56 Looking at the Traditional 401(k) Plan 57 The rules governing the traditional 401(k) 57 The features of the traditional 401(k) 59 Checking Out Other Varieties of 401(k) Plans 64 Finding Safe Harbor 401(k) plans 64 Easing into SIMPLE 401(k) plans 65 Going it alone with solo 401(k) plans 66 Paying taxes up front with Roth 401(k) plans 67 Chapter 5: Increasing Your Income with IRAs . . . . . . . . . . . . . . . . . . . .69 The Fundamentals of Traditional IRAs 70 Beginning with the basic rules 70 Determining your eligibility 71 Contributing to a traditional IRA 72 Protecting Your Pension For Dummies x 02_102138 ftoc.qxp 6/21/07 6:51 PM Page x [...]... .116 Reviewing your plan’s vesting policies 116 xi xii Protecting Your Pension For Dummies Chapter 8: Planning for Retirement While You’re Still Working 117 Tallying the Cost of Your Retirement .118 Calculating your current net worth 118 Considering your retirement age and lifestyle options 119 Estimating how much you need to save 120 Gathering the Goods on Your Pension Plan... information that your plan maintains for you Review the pension SPD, plan amendments, and other items you have in your possession Chapter 8 has all the info that you need to help you plan your retirement, including painting a complete picture of your retirement and finding financial help Receiving your pension distribution When it comes to your pension, the bottom line goal is to actually receive your. .. can potentially put your plan in jeopardy or affect your ultimate payout These situations include events such as when your employer merges with another company or sells its business or when you terminate employment We also explain the personal issues, such as divorce and bankruptcy, that you need to look out for when trying to protect your pension 2 Protecting Your Pension For Dummies This book also... transgressions Part IV: Shielding Your Pension from Life’s Ups and Downs Financial problems, divorce, and premature death are potential life problems for just about everyone And when these unfortunate events occur, they undoubtedly affect your pension So, this part tells you the rules about borrowing from your pension It also explains how and when your pension assets need protection from your creditors, what to... xviii Protecting Your Pension For Dummies Introduction T here are no pension superheroes or TV shows featuring exciting pension stories And people don’t go around telling lots of rip-roaring pension jokes or pithy anecdotes Yet pensions may be the single most important and least understood subject in the country You’re reading these words at a time when pensioners face a critical turning point for the... Eye on Your Plan When Your Employer Combines with Another 166 What are the possible plan changes after a merger or acquisition? .166 How do you keep track of all plan information and changes? 168 Considering Your Options When You End Your Relationship with Your Employer 169 Defined contribution plans .170 Defined benefit plans 171 Protecting Your Pension if Your Employer... and bankruptcy on your pension ᮣ Finding out what to do when you don’t get the pension you earned Y ou’ve worked hard for years, and you’re looking forward to your welldeserved retirement But are you truly ready? With this book, you’ll be on your way We want to help you prepare for this exciting time in your life, but we don’t want to bog you down with legal details We’ll let the pension experts argue... available to you upon your request Your plan can’t reduce the rate of the accrual of the benefits that you’ve already accrued, but it may do so for future benefits ߜ Vesting: It’s up to your company to determine when your benefits become vested, and this information must be specified in your SPD Don’t worry, though; your company must comply with minimum vesting schedules Your company can vest your benefits... through the Pension Protection Act of 2006 are covered in this part as well 3 4 Protecting Your Pension For Dummies Part II: Making Sure That You Receive the Pension You Earned In this part, we explain what it takes to qualify for a pension, and we go over the rules for accrual and vesting We tell you what documents to assemble for retirement, and we explain why you need them and how to get them Finally,... then, is to follow your plan’s requirements for applying for a pension benefit Keep in mind the following considerations: ߜ If you take your distribution before you’re 591⁄2 years old, you may be socked with a penalty tax for taking it too soon ߜ You may be forced to take a distribution in some instances ߜ If you wait until you become 701⁄2, you may be socked with a penalty for taking your distribution . by Robert D. Gary and Jori Bloom Naegele Protecting Your Pension FOR DUMmIES ‰ 01_102138 ffirs.qxp 6/21/07 6:47 PM Page i Protecting Your Pension For Dummies ® Published by Wiley Publishing,. what happens if your plan is changed or terminated 18 Safeguarding Your Pension from Life’s Trials 19 Getting a loan from yourself 19 Protecting your family 20 Watching out for your ex 21 Staying. 187 Chapter 13: Hitting Yourself Up for a Loan 189 Chapter 14: Surveying Survivorship Benefits 201 Chapter 15: Dividing Your Pension between You and Your Ex 215 Chapter 16: Protecting Your Retirement