Definitions Of Common Pension-Related Terms

Pension law is complicated — all the more so because it has its own vocabulary. At Hertz Schram PC, we strive to empower employees and retirees to understand and enforce their pension rights. One way we do that is by explaining legal terminology in clear, easy-to-understand language.

Below you will find definitions of common pension terminology. For help with specific pension-related questions, we invite you to visit our FAQ page or contact lead pension attorney Eva Cantarella at 248-335-5000 for a free consultation. Based in Michigan, we handle pension claims throughout the state and nationwide (including Indiana, Illinois, Ohio and Pennsylvania).

Class action claim: A lawsuit brought on behalf of a large group of people (or class) who have been wronged in the same way. Because these claims involve large-scale violations with significant sums of money at stake, they hold companies accountable in a way that individual claims simply cannot. A class representative spearheads the lawsuit along with his or her attorney and takes an active role in fighting for the entire class's interests.

Critical or endangered status: When a multiemployer pension plan lacks sufficient funds to pay out benefits, it may fall into endangered, critical, or critical and declining status. These designations trigger certain rights and responsibilities. The most serious status — critical and declining — applies to plans that are 65 percent or less funded, and their funding is declining.

Defined benefit plan: These plans pay out a predetermined benefit upon your retirement — for example, a monthly amount based on your salary, years of service and other factors. Defined benefit plans are funded by your employer.

Defined contribution plan: Under these plans, you and/or your employer set aside funds in your individual retirement account. You can have a say in how these funds are invested or leave it up to the professional fund managers. Your account balance will fluctuate over time, depending on how these investments perform. A 401(k) is one of the most common types of defined contribution plans.

ERISA: Shorthand for the Employee Retirement Income Security Act, this landmark federal law governs most pension plans in the private sector. It's the source of many important rights for plan participants.

Fiduciary: Broadly speaking, a fiduciary is any person or entity that has a legal responsibility to manage property for the benefit of someone else. In the context of pension plans, fiduciaries include the plan administrator as well as any third parties that manage funds on behalf of the plan, participants, and beneficiaries.

Fiduciary duties: Because they are responsible for managing property that is not their own, fiduciaries are held to high standards. They have certain legal duties, including:

  • A duty of loyalty to the participants and beneficiaries as a whole, which means they must always put their interests first and must not engage in self-dealing or favoritism among individual beneficiaries
  • A duty of prudence in managing the funds, which means they must manage expenses, investments, fees and other fund matters with the same degree of care, skill and diligence as if their own money were at stake
  • A duty to diversify in making investment decisions, which means avoiding overly risky investments and appropriately spreading out the risk to avoid catastrophic losses

If fiduciaries fail to live up to these duties, they can be held legally responsible through a breach of fiduciary duty claim.

Multiemployer pension plan: These are the behemoths of pension plans. They are based on collective bargaining agreements, and they typically involve thousands of plan participants and dozens (or even hundreds) of employers who contribute to a centrally managed fund.

Plan administrator: The administrator is responsible for administering the plan in accordance with its terms as well as federal law. Administrators may be employers, committees, boards of trustees, or other entities. They can enlist the help of third parties (such as investment managers, accountants, consultants and actuaries) to handle discrete aspects of the plan. However, they are ultimately responsible for the proper administration of the pension plan as a whole.

Plan beneficiary: A person designated by a participant, or the terms of the plan, who is or may become entitled to a benefit under the plan.

Plan participant: An employee or former employee of an employer who is or may become eligible to receive a benefit from a plan which covers employees of the employer.

Plan benefits: These are the entitlements that plan participants and their beneficiaries receive under the terms of the plan. They may take multiple forms. For example:

  • An annuity involves periodic (usually monthly) payments at a set amount. The payments may be for life or for a specified period of time.
  • A lump-sum payment is a single payout, at one time, of all or a portion of the benefits a plan participant is entitled to receive. A lump sum pension payout may be rolled into an individual retirement account (IRA) or other eligible retirement plan and may be calculated based on factors such as vesting, discount rates, and mortality tables.

Plan sponsor: The sponsor is the employer, union, or group of employers that provides the plan for the benefit of employees.

Summary plan description (SPD): This important document explains how your plan works, including:

  • What benefits you're entitled to receive
  • How payouts are calculated
  • When your benefits become vested
  • How to file a benefits claim (and appeal an adverse decision)
  • Your rights if the plan terminates or changes hands
  • Who administers the plan

By law, your plan must provide you with this document within 90 days after you become a participant.