Employers do not have to offer retirement plans to their employees and some often choose not to provide them. Those that make such a provision offer either of two types of retirement plans for employees. A "defined benefits plan" allows employees to invest in a plan that will provide them with a set monthly income during their retirement years. In contrast, a "defined contribution plan" allows both the employee and employer to make contributions; however, there is no pre-set monthly amount paid during retirement.
According to an IRS ruling, employees may force employees to participate in the company's retirement plan provided sufficient notice is given to the workers. Employer-provided retirement products such as 401(k) plans allow employees to save for their later years in a way that is consistent and tax-friendly. Through payroll deduction, employees invest a small percentage of their earnings into the plan each pay period. Some individuals choose to save for their retirement on their own through IRA accounts.
A Closer Look
Employers have the right to force employees to participate in a retirement plan, much as they can do with some employer-provided health insurance plans. An IRS ruling permits mandatory 401(k) contributions provided the employer has provided sufficient notice to employees. The ruling applies particularly to cases where an employee is hired with the understanding that he must elect out of the company's 401(k) plan but refuses to do so after a certain period of time. As such, employers can automatically deduct three percent of his wages and invest them into a 401(k) plan. In this instance, an employee is automatically enrolled in the company's 401(k) plan, which must be either a defined benefits plan or a defined contribution plan.
While the IRS ruling may help companies increase their 401(k) plan participation, the attached benefits,may be limited if those making mandatory contributions do not select an investment fund. Thus, it is imperative for employers to urge employees to do so. The federal Employee Retirement Income Security Act (ERISA), section 404, makes employers liable for the investments of their employees.
Companies often force employees to retire for a variety of reasons including corporate downsizing and because of work performance. However, forcing an employee to retire is not the same as forcing an employee to have a retirement plan. Typically, retirement plans via pensions are in place for those who may be forced to retire, such as employees in civil service positions or in the teaching profession.