risk and insurance chapter 17

Fundamentals of Private Retirement Plans

Private retirement plans impact society and the economy

• They help people save for retirement and reduce future reliance on government programs

• ERISA (Employee  Retirement Income Security Act) — 1974

• Pension Protection Act — 2006

• Employer contributions are tax-deductible (within limits)

  • Employers can deduct what they contribute to employees’ retirement plans from their taxable income

    • Example: A company contributing $5,000 per employee can reduce its taxable income by that amount (up to certain legal limits

• Investment earnings grow tax-deferred

  • The money your retirement plan earns (like interest, dividends, or capital gains) isn’t taxed until you withdraw it

    • Example: If your 401(k) earns $1,000 in a year, you don’t pay taxes on that $1,000 until retirement

• Qualified plans get favorable tax treatment

  • Plans that meet ERISA requirements are called “qualified” and enjoy tax benefits

    • Example: 401(k) plans and traditional pensions are qualified plans

ERISA (Employee Retirement Income Security Act) — 1974

Sets minimum standards for retirement plans to protect employees

• Example: Ensures that a company can’t just take your retirement money or mismanage it

Pension Protection Act — 2006

Requires employers to contribute more to pension plans if the plans are underfunded

• Example: If a company’s pension fund is running low, they must put in extra money to make sure retirees get paid

Qualified Plan

A retirement plan that meets government rules (like ERISA’s) and gets special tax benefits

• Example: A 401(k) is a qualified plan because it follows federal guidelines and allows your money to grow tax-deferred until you retire

Qualified Plan Requirements and Coverage Rules

Qualified plans must benefit all workers, not just highly paid ones

• The goal is fairness — retirement plans can’t favor only top executives or owners

HCE (Highly Compensated Employee):

• Defined as someone who either:

  • Earns $120,000 or more per year, or

  • Owns 5% or more of the company

• Example: If Maria owns 10% of her company or makes $130,000, she’s an HCE

Minimum coverage requirements:

• To qualify for tax benefits, a plan must include enough lower-paid workers

• Ratio-percentage test:

  • Compares how many non-highly compensated employees (NHCEs) are covered versus HCEs

• Rule: At least 70% as many NHCEs must be covered compared to HCEs

  • Example: If 100% of HCEs are in the plan, at least 70% of NHCEs must be too

• Average benefits test:

• Compares the average benefit each group gets

• Rule: NCHEs must get at least 70% of the average benefit given to HCEs

  • Example: If HCEs get an average 10% of pay in retirement benefits, NHCEs must get at least 7%

Highly Compensated Employee (HCE)

Someone who either earns $120,000 or more per year or owns at least 5% of the company

• Example: If Sarah makes $130,000 a year at her company, she’s considered a highly compensated employee

Minimum Coverage Requirements

Rules that make sure a company’s retirement plan includes enough lower-paid workers, not just the top earners

Ratio-Percentage Test

Checks whether enough lower-paid employees are covered by a company’s retirement plan compared to higher-paid employees

• Example: If 100% of highly paid workers are in the plan, then at least 70% of the lower-paid workers must also be included to pass the test

Average Benefits Test

Ensures that lower-paid employees receive retirement benefits that are at least a certain percentage of what higher-paid employees get

• Example: If highly paid employees get an average of 10% of their salary in retirement benefits, lower-paid employees must get at least 7% to pass the test

Minimum Age and Service Requirement

Employees usually must meet certain age and service rules before joining a retirement plan

• Example: A company might require you to be at least 21 years old and have worked there for one year before you can join

Eligibility Rule (standard requirement)

All employees who are age 21 or older and have completed 1 year of service must be allowed to participate

• Example: If you start working at age 20, you’d become eligible to join the plan on your 21st birthday (after completing one year of work)

Normal Retirement Age

The age when a worker can retire and receive full, unreduced benefits

• Usually age 65

• Example: If your plan’s normal retirement age is 65, you’ll get your full pension at that age

Early Retirement Age

The earliest age a worker can retire and start receiving benefits (usually smaller)

• Example: A plan may allow early retirement at age 55, but your monthly benefit might be reduced since you’re retiring sooner

Deferred Retirement Age

Any age after the normal retirement age when an employee chooses to keep working and delay benefits

• Example: If you work until age 68 instead of 65, that’s deferred retirement — you’d likely earn extra benefits for working longer

Vesting

Means how much of the employer’s contributions (or benefits from them) an employee gets to keep if they leave the company before retirement

• Example: If you quit after 4 years, vesting determines how much of your company’s retirement contributions belong to you

Minimum vesting standards (for defined-benefit plans):

• Federal law requires certain vesting schedules to protect workers’ rights to their benefits

  • Five-year cliff vesting

  • Three-to-seven-year graded vesting

Five-Year Cliff Vesting

You become 0% vested for the first 4 years, then 100% vested after 5 years of service

• Example: If you leave after 4 years, you get nothing; if you leave after 5 years, you keep all of your earned benefits

Three-to-seven-year graded vesting

Vesting increases gradually over time:

• 3 years: 20% vested

• 4 years: 40% vested

• 5 years: 60% vested

• 6 years: 80% vested

• 7 years: 100% vested

• Example: If you leave after 5 years, you keep 60% of your employer’s contributions

Faster vesting for defined-contribution plans

These plans (like 401(k)s) must vest faster than defined-benefit plans to motivate employees to join and stay

• Example: The law ensures workers can keep their employer’s contributions

• Three year cliff vesting

• Two-to-six year graded vesting

  • Vesting increases gradually:

    • 2 years: 20% vested

    • 3 years: 40% vested

    • 4 years: 60% vested

    • 5 years: 80% vested 

    • 6 years: 100% vested

  • Example: If you leave after 4 years, you keep 60% of your employer’s contributions

Three-Year Cliff Vesting

Employees are 0% vested for the first 2 years and become 100% vested after 3 years of service

• Example: If you leave after 2 years, you lose the employer contributions; if you stay until year 3, you keep it all

Withdrawal Rules and Penalties for Qualified Plans

Early Distribution Penalty

Exception — disability:

• If you become permanently disabled, you can withdraw funds without the 10% penalty

  • Example: An employee who can no longer work due to a qualifying disability can access their retirement money early

Required distributions (RMDs):

• You can’t keep your money in your retirement plan forever — withdrawals must start by a certain age

• Rule: Distributions must begin by April 1 of the year after you turn 70½

  • Example: If you turn 70½ in 2025, you must start withdrawals by April 1, 2026

Exceptions to RMD rule:

• Inherited IRAs and Roth IRAs don’t have the same required start date

  • Example: A Roth IRA owner can leave the money untouched for life without facing RMDs

Early Distribution Penalty

Taking money out of a qualified plan before age 59½ usually triggers a 10% penalty in addition to income tax

• Example: If you withdraw $10,000 early, you’d owe a $1,000 penalty plus regular taxes

Integration of Private Pension Plans with Social Security

Integration with Social Security:

• Many private pension plans are designed to work together with Social Security benefits

  • Example: Since Social Security already gives proportionally more help to lower earners, employers can design their pension plan to give a little more to higher earners

Purpose of Integration:

• It allows employers to increase pension benefits for highly compensated employees (HCEs) without raising costs for lower-paid workers

  • Example: A company might give higher earners an extra pension benefit to balance out the smaller percentage they get from Social Security

Permitted Disparity Rules:

• These are IRS rules that limit how much extra benefit an employer can give to highly compensated employees under an integrated plan

  • Example: Employers can’t just give top earners unlimited extra pension benefits — they must stay within set limits to keep plans qualified

Types of Qualified Retirement Plans

Variety of plans available

• Employers can choose from different types of qualified plans depending on their goals, budget, and workforce

  • Example: A small business might pick a simple plan like a 401(k), while a large company might use a pension plan

Two main categories:

1. Defined-benefit plans

2. Defined-contribution plans

Different rules for each type:

• Defined-benefit and defined-contribution plans have different funding, vesting, and payout rules under the law

Defined-Benefit Plan

A retirement plan that guaranteed a specific benefit when you retire, usually based on salary and years of service

• Example: A traditional pension that promises you $2,000/month for life after retirement

Defined-Contribution Plan

A retirement plan where the contributions are fixed, but the final benefit depends on investment growth

• Example: A 401(k) where you and your employer put in money each year and your retirement balance depends on how the investments perform

More info about Defined Benefit Plans

• They retirement benefit is fixed (known) — the employee knows how much they’ll receive at retirement

• However, the employer’s contributions can vary depending on what’s needed to fund that promised benefit

  • Example: If the investments in the pension don’t perform well, the employer must contribute more money to keep the plan on track

• Benefit calculation methods:

  • Career-average earnings

  • Final average pay

• Past-service credits

Contribution limits

• There are federal limits on how much can be contributed or promised in benefits under a defined-benefit plan — this keeps the plans fair and prevents excessive tax breaks for high earners

Maximum annual benefit (2018 limit)

• A retiree’s annual pension benefit can’t exceed 100% of their average pay for their three highest consecutive years or $220,000, whichever is lower

• Example:

  • If your highest 3-year average salary is $200,000 — you could get up to $200,000 per year

  • If your highest 3-year average salary is $300,000 — you’re capped at $220,000 per year

Maximum compensation counted

• When calculating benefits, the most salary an employer can count toward the pension formula is $275,000

• Example:

  • If you earn $400,000 a year, the plan still only counts up to $275,000 when figuring out your pension amount

Career-Average Earnings

The benefit is based on your average salary over your entire career with the company

• Example: If your average pay over 30 years was $50,000, your pension might be a percentage of that (ex. 2% * 30 years * $50,000 = $30,000 per year)

Final Average Pay

The benefit is based on your average salary from your last 3-5 years before retirement (usually your highest earnings years)

• Example: If your last 5 years averaged $70,000, your pension might be 2% * 30 years * $70,000 = $42,000 per year

Past-Service Credits

Employers can give credit for years worked before the plan was created

• Example: If an employee worked 5 years before the company started the pension plan, the employer might count those 5 years toward their total service

Defined-Benefit Plan Formulas

Defined-benefit plans calculate your retirement money using formulas — there are different ways they can do it:

• Unit-benefit formula: Based on both your salary and how long you’ve worked

  • 🧮 Example: You get 1.5% of your average pay × years of service → If you worked 30 years, you’d get 45% of your pay.

• Flat percentage plan: Everyone gets the same percent of pay each year
  🧾 Example: 2% of your yearly salary for each year worked.

• Flat amount plan: Everyone gets the same dollar amount per year worked, no matter their salary.
  💵 Example: $100 for every year you worked.

Basically, it’s explaining the different formulas employers use to decide your retirement benefit.

Pension Benefit Guaranty Corporation (PBGC) and Plan Funding Rules

• The PBGC is a federal agency that protects workers’ pensions if a company’s pension plan fails.

• If a pension plan ends, PBGC guarantees employees still get their vested benefits, but only up to a certain limit.

  • Example: In 2018, the most someone could get was $5,607.95 per month at age 65.

• Many traditional pension plans don’t have enough money saved (they’re underfunded).

• The Pension Protection Act of 2006 made it a rule that plans had to be fully funded by 2015.

Cash-Balance Plans

Cash-balance plan: A type of defined-benefit plan where your retirement benefit is shown as a hypothetical account balance rather than a fixed monthly payment.

• Example: Your “account” might show $100,000 at retirement, even though the employer guarantees you a specific benefit based on it.

How it works:

• Each year, your account gets two types of credits:

  1. Pay credit: A percentage of your salary added to your account each year.

     • Example: If your salary is $50,000 and your plan gives a 5% pay credit, $2,500 is added to your account that year.

  2. Interest credit: An amount added based on a set interest rate or index to grow your account.

     • Example: If your account has $10,000 and the plan credits 4% interest, $400 is added that year.

Employer role:

• The employer bears the investment risk and gets any investment gains or losses.

• Many companies convert traditional pension plans into cash-balance plans to control costs.

Money Purchase Plan

A defined-contribution plan with individual accounts and a fixed percentage of salary contributed by the employer each year.

• Example: $5,000 added annually for an employee earning $50,000 with a 10% contribution.

Contribution Limits for Defined-Contribution Plans

• Contribution limits: There’s a maximum amount you can contribute to a defined-contribution plan each year.

  • Example: In 2018, you could contribute up to 100% of your salary or $55,000, whichever is lower.

• Catch-up contributions: Workers age 50 or older can contribute extra money to boost retirement savings.

  • Example: If you’re 52, you could add an additional $6,000 to your plan on top of the regular contribution limit.

Advantages and Disadvantages of Defined-Contribution Plans

Why employers like them:

• Most new retirement plans are defined-contribution because the cost is lower.

• Employers don’t have to give past-service credits or guarantee a specific retirement benefit.

  • Example: A company only contributes a fixed 5% of your salary each year, no matter how long you’ve worked in the past.

Disadvantages for employees:

• Retirement benefits are uncertain — you can only estimate how much you’ll get.

• Investment losses are the employee’s responsibility.

• Some employees may not understand investment choices, which can affect retirement savings.

  • Example: If your investments perform poorly, your account balance at retirement could be much lower than expected.

Section 401(k) Plans: Basics

Key idea: A Section 401(k) plan is a retirement plan that lets employees choose between taking pay now (taxable) or putting it into the plan tax-deferred.

• Example: You can choose to put $5,000 of your salary into your 401(k) this year and not pay taxes on it until retirement.

Contributions:

• Both employer and employee usually contribute.

• Employers often match part or all of what the employee contributes.

  • Example: If you contribute 5% of your salary, the employer might also contribute 3–5%.

Investment choice:

• Employees decide how to invest the funds within the plan (stocks, bonds, mutual funds, etc.).

Elective deferral:

• A voluntary decision by employees to invest part of their salary into the 401(k) instead of taking it as immediate pay.

  • Example: Choosing to have $200/month from your paycheck go into your 401(k) rather than receiving it in cash.

401(k) Contributions and Deferral Limits

Tax treatment:

• Contributions to a 401(k) grow tax-free until withdrawal.

• Withdrawals are taxed as ordinary income.

  • Example: You invest $5,000 this year; it grows to $6,000 by retirement, and you pay taxes when you withdraw it.

Contribution limits (2018):

• Employees under age 50 can contribute up to $18,500 via elective deferrals.

Preventing discrimination:

• Firms must pass the actual deferral percentage (ADP) test to ensure plans don’t favor highly compensated employees.

  • Example: If top earners defer a large percentage of salary, the company must make sure lower-paid employees are also deferring enough to pass the test.

Actual Deferral Percentage (ADP) Test

A rule that ensures a 401(k) plan does not disproportionately favor highly compensated employees by comparing their average deferral rate to that of non-highly compensated employees.

• Example: If executives defer 10% of their salary, the plan must ensure lower-paid employees defer a proportionate amount so the plan passes the ADP test.

401(k) Early Withdrawals and Hardship Exceptions

Early withdrawal penalty:

• Taking money out of a 401(k) before age 59½ usually triggers a 10% tax penalty, in addition to ordinary income taxes.

• Hardship withdrawals:

  • Some plans allow early withdrawals without penalty for certain situations:

    • Preventing eviction or foreclosure

    • Paying nonreimbursable medical expenses

    • Purchasing a primary residence (up to $10,000)

    • Paying post-secondary education expenses

    • Covering burial or funeral costs

Loan provision:

• Many 401(k) plans allow you to borrow from your account without paying the 10% early withdrawal penalty.

  • Example: You borrow $5,000 from your 401(k) to cover emergency car repairs and pay it back over time.

Loan Provision

A feature in a 401(k) plan that allows participants to borrow money from their account without triggering an early withdrawal penalty.

• Example: Borrowing $5,000 from your 401(k) for an emergency and repaying it over several years.

Roth 401(k) Plans

Key idea: A Roth 401(k) lets you contribute after-tax dollars, and qualified withdrawals at retirement are tax-free.

• Example: You contribute $5,000 this year (already taxed), and if the account grows to $8,000 by retirement, you pay no taxes when you withdraw it, as long as you’re at least 59½ and the account is at least 5 years old.

Investment growth:

• Earnings in a Roth 401(k) grow tax-free, unlike traditional 401(k)s where taxes are deferred.

Roth 401(k)

A retirement plan where contributions are made with after-tax dollars, but qualified withdrawals are tax-free.

• Example: Contributing $5,000 now and withdrawing $8,000 at retirement without paying any taxes.

Individual 401(k) Plans

Key idea: An Individual 401(k) combines a profit-sharing plan with a 401(k) plan and is designed for self-employed individuals with no employees other than a spouse.

• Contribution limits (2017):

  • Up to 25% of compensation as employer contribution.

  • Plus, the owner can make a salary deferral up to $18,500, reducing taxable income.

  • This allows for higher contributions than other plans like SEPs, with less administrative cost.

Individual 401(k)

A retirement plan for self-employed individuals that combines profit-sharing and 401(k) features, allowing higher contributions with relatively low administrative costs.

• Example: A freelancer contributes $10,000 as employer contribution and $18,500 as salary deferral to their Individual 401(k) in one year.

Section 403(b) Plans: Basics

Key idea: A Section 403(b) plan, also called a tax-sheltered annuity (TSA), is a retirement plan for employees of public schools and tax-exempt organizations.

• Example: A teacher can contribute part of their salary into a 403(b) plan to save for retirement.

Contributions:

• Employees can voluntarily invest a fixed portion of their salary.

• Employers may match contributions.

Investment options:

• Funded by purchasing an annuity or investing in mutual funds.

• Employer must purchase the annuity, which is nontransferable.

Section 403(b) / Tax-Sheltered Annuity (TSA)

A retirement plan for employees of public educational institutions or tax-exempt organizations where contributions grow tax-deferred.

• Example: A school employee contributes $200/month to a 403(b) that grows tax-deferred until retirement.

Nontransferable

The asset or annuity cannot be moved or sold to another account or person.

• Example: If your 403(b) buys an annuity, you cannot transfer that annuity to another employer’s retirement plan.

403(b) Contributions, Catch-Up, and Roth Option

Employer contributions:

• Any money the employer contributes to a 403(b) is nonforfeitable — the employee always owns it, even if they leave the job.

  • Example: If your school contributes $3,000 to your 403(b) this year and you leave next month, you keep the $3,000.

Contribution limits (2017):

• Employees under 50: $18,500 maximum elective deferral.

• Employees 50 and older: additional $6,000 catch-up contribution allowed.

Roth 403(b) option:

• Employers may allow contributions to a Roth version, where you pay taxes now but withdrawals are tax-free in retirement.

Nonforfeitable

A contribution or benefit that belongs to the employee immediately and cannot be lost, even if they leave the employer.

• Example: Employer puts $3,000 into your 403(b); you leave the school next month — you keep the $3,000.

Profit-Sharing Plans: Basics

Key idea: A profit-sharing plan is a defined-contribution plan where the employer contributes money based on company profits.

• Example: If a company makes $1 million in profits, it might contribute a portion (e.g., 5%) to employees’ retirement accounts.

Flexibility:

• The employer does not have to make contributions if profits are low or negative.

Distribution:

• Funds are paid to employees at retirement, death, disability, termination, or after a set number of years — but only the vested portion.

  • Example: If you leave the company before fully vested, you might only receive part of what the employer contributed.

Profit-Sharing Plan

A retirement plan where the employer contributes a portion of company profits to employee accounts, usually at year-end.

• Example: Company profits $1 million, 5% ($50,000) goes into employees’ retirement accounts.

Profit-Sharing Plan Contributions and Limits

Contribution methods:

• Contributions can be discretionary (employer decides each year) or based on a formula (e.g., a fixed percentage of salary).

  • Example: Employer may decide to contribute 5% of salary this year or skip contributions if profits are low.

Contribution limits:

• Employer contributions are capped at 25% of an employee’s compensation.

• In 2018, maximum compensation considered for contributions was $275,000.

  • Example: If you earn $300,000, only $275,000 counts toward the 25% limit — maximum contribution = $68,750.

Early withdrawal penalty:

• Taking money out before retirement age triggers a 10% tax penalty, in addition to ordinary income taxes.

  • Example: Withdrawing $10,000 early could cost $1,000 in penalties.

Retirement Plans for the Self-Employed

Key idea: Self-employed individuals can have retirement plans that work similarly to corporate plans, with tax benefits.

• History:

  • These were formerly called Keogh plans.

  • Example: A self-employed graphic designer contributes part of their income to a Keogh plan and defers taxes until retirement.

• Tax treatment:

  • Contributions are income-tax deductible (up to limits).

  • Investment earnings grow tax-deferred.

  • Taxes are paid only when money is withdrawn.

Keogh Plan

A retirement plan for self-employed individuals or unincorporated businesses, allowing tax-deductible contributions and tax-deferred growth.

• Example: A freelancer contributes $10,000 to a Keogh plan and pays taxes only when withdrawing at retirement.

Simplified Employee Pension (SEP) Plans

A retirement plan in which the employer contributes to individual IRAs for employees, with low administrative costs and immediate vesting.

• Example: A small business owner contributes $5,000 to each eligible employee’s SEP-IRA this year; employees can withdraw it in retirement.

Key idea: A SEP is a retirement plan where the employer contributes to an IRA for each eligible employee.

Advantages:

• Low start-up costs for employers.

Eligibility:

• Employees age 21 or older, who worked at least 3 of the last 5 years, and earned $600+ are eligible.

Contributions:

• Employer must contribute equally for all eligible employees; employees cannot contribute themselves.

Vesting:

• Contributions are fully and immediately vested — employees own them right away.

SIMPLE IRA Plans

Key idea: A SIMPLE plan is a retirement plan for small employers (100 or fewer employees) that don’t have another qualified plan.

Advantages:

• Smaller employers are exempt from most nondiscrimination and administrative rules, making it a Safe Harbor plan.

Contribution limits (2018):

• Employees can contribute up to 100% of their salary, capped at $12,500.

• Employers contribute via matching or nonelective contributions:

  • Matching: 1%–3% of employee pay

  • Nonelective: 2% of pay for all eligible employees

SIMPLE (Savings Incentive Match Plan for Employees)

A retirement plan for small employers that allows employee salary deferrals and employer contributions, with simplified rules.

• Example: An employee contributes $10,000 of their salary to a SIMPLE IRA, and the employer adds a 3% match of $3,000.

Saver’s Credit: Encouraging Retirement Savings

Key idea: The Saver’s Credit is a tax credit that encourages low- to moderate-income earners to save for retirement.

How it works:

• The credit reduces the actual taxes owed on a dollar-for-dollar basis, up to a limit.

• The amount of the credit depends on:

  • Your contributions to retirement plans

  • Your adjusted gross income (AGI)

History:

• The Saver’s Credit was created in 2001.

Funding Agency

A financial institution that manages or accumulates pension funds to pay retirement benefits.

• Example: A commercial bank acts as a funding agency for a company’s pension plan.

Trust-Fund Plan

A plan administered by a bank or individual trustee, holding assets in a trust for employees.

• Example: A bank manages a pension trust where employees’ retirement funds are kept separate from the company’s assets.

Insured Plan

A plan administered by a life insurance company, often using insurance products to fund benefits.

• Example: A company buys a life insurance policy to fund promised retirement benefits.

Split-Funded Plan

A plan administered jointly by a bank (trustee) and an insurance company.

• Example: Part of the pension is in a trust managed by a bank, and part is funded through an insurance policy.

Funding Instrument

A legal agreement or insurance contract that specifies how the funding agency will accumulate, manage, and pay out pension funds.

• Example: A trust agreement that outlines how contributions are invested and when retirees receive benefits.

Trust-Fund Plans and Separate Investment Accounts

Trust-fund plan:

• All contributions are deposited with a trustee, who invests according to the trust agreement.

• The trustee does not guarantee the fund’s adequacy, principal, or interest rates.

  • Example: A bank manages a company pension trust, investing contributions in stocks and bonds, but the bank doesn’t promise a specific return.

Separate investment account:

• A group pension product with a life insurance company where the plan administrator can choose from multiple investment options.

• Pension contributions can be invested in stock funds, bond funds, or similar accounts.

  • Example: A company’s 403(b) plan invests contributions in a separate account offering a mix of growth stock and bond funds managed by an insurance company.

Separate Investment Account

An account within a life insurance company’s pension product that allows contributions to be invested in specific funds chosen by the plan administrator.

• Example: Choosing to invest employee contributions in a stock-focused separate account managed by an insurer.

Guaranteed Investment Contracts (GICs)

Is an arrangement where a life insurer guarantees a fixed interest rate on a lump-sum deposit for a set number of years.

• Example: A company deposits $500,000 into a GIC with an insurer, which guarantees a 4% annual return for 5 years.

Use in retirement plans:

• Often used to fund the fixed-income option in defined-contribution plans.

• Many GICs provide annuity options at retirement.

  • Example: At retirement, the employee can choose to receive a lifetime monthly annuity based on the GIC balance.

Problems and Issues in Tax-Deferred Retirement Plans

Common problems:

• Many workers have inadequate 401(k) balances, not enough for retirement.

• Incomplete coverage of the workforce — not all employees participate in retirement plans.

• Lower benefits for women due to historically lower income and fewer years in the workforce.

• Limited protection against inflation — savings may lose purchasing power over time.

• Workers sometimes spend lump-sum pension distributions instead of saving them.

• Investment mistakes by participants can jeopardize financial security.

  • Example: Investing too aggressively in a volatile stock fund could result in significant losses before retirement.