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Chapter 12 Retirement Plans(pension plans) (DC (Defined Contribution (eg.…
Chapter 12 Retirement Plans(pension plans)
DC (Defined Contribution
eg. an ER promises to contribute a % of an EE's salary to a DC plan
eg. 2%
known- annual contribution made by the ER
unknown-annual retirement benefit upon retirement
why unknown?
years of service(YOS)
future salary is unknown
EE may also contribute
rate of return of plan assets (ROR)
most uncertain
price of a life annuity purchased when the ER retires
KEY:
uncertainty regarding retirement income rests with the EE
Section 401 (K) plan(for profit)/ 403 (b)(non-profit)
401 is also known as a CODA plan
cash or deferred arrangement
eg. 2018 earned 18,500
cash now taxable
elect to defer receive till later taxable later (compound)
elective deferred
ERs may/may not match a portion of an EE's contribution
EEs generally have the choice of investment vehicle
2018
EE<50
1 more item...
EE 50+
1 more item...
max contribution between ER/EE
1 more item...
DB Plan
DB plan- Defined Benefit Plan (gov. job)
Traditional pension plan
known: formula which can determine a benefit at reitremnt
unknown: amount an ER must contribute in any particular year in order to "fund" the promised benefit.
ＫＥＹ：ＥＲ bears all uncertainty + investment risk
Examples of DB Formulas
for every YOS, an ER promises $30/monthly income starting at the normal retirement age (NRA)
65=NRA;30YOS
monthly income = $30($30/month)= $900 /month
$10,800/ yr starting at 65 for as long as the retiree lives
:arrow_right:
plan must purchase a life annuity that would yield $10800/yr
annuitant (a person who receives an annuity.)
final average salary plan
eg. for each YOS, an ER promises a stated % (2% eg) of final avg, salary(3-5years before your retire) starting at the NRA
YOS=30; NRA=65
64-65:50,000
63-64 49,000
62-63 48,000
61-62 47,000
60-61 46,000
%=2%, 5 yr final avg. salary
benefit at retirement:(30)*(2%)(48000)
$28,8000 (yr starting at age 65) for as long as the retiree lives
Pension Fundings
ERs must prefund pension obligations
$must be contributed in advance of retirement
funds are held in a trust-fund
funding agency
at retirement
funds are released and paid in one of two funds
Lump-Sum distribution
common
DC plans
annuity payment
trust purchases a life annuity to pay the promised benefit
DB plan
If an EE is married
joint+Yr survivor annuity must be offered
Plan Termination Ins.
DB plans may be underfunded
ERs must select an actuarial cost method
indicate how much $ must be contributed each yr to fund the promised benefit
actuarial cost assumptions
salary
expenses
age of retirement
rate of debt , disability + turnover
investment returns
If assumptions are wrong, a plan can be overfunded/underfunded
IF a DB plan is terminated +underfunded, EEs may not be able to receive promised benefits
Pension Benefit Guaranteed corporations (PBGC)
provides plan termination insurance
pays a portion of the unfunded pensions obligation
where do they get money from?
taxpayers
resume:flood insurers terrorism reinsured TRIA; PBGC
required for DB plans
not required for DC plan
not necessary (just put money inside)
backing up a lot of underfunded plans
billions of $
who has DB plan? airline
merge? PBGC made them merge
ERISA(Employee Retirement Income Security Act )1974
Establish min. standard of operation for pension plan
goal
preserve retirement benefits for retiree
Vesting
refer to the degree to which a plan participants' rights are non-forfeitable
vested benefit=payment
status does not beyond on employment status at retirement
ex. an EE has 4 YOS + has been participating in a DC plan
EE contributions to date=$40,000
ER contribution to dates= $60,000
at this point, interest on plan assets= $10,000
If an EE leaves now, how much would be able to transfer to the new ER's Plan?
min.
$40,000+$4(interest)=$44,000
vesting schedule
3yr cliff vesting
0%
0-3
eg. $60,000+6,000
100%
3+
2-6 rule
EE could take 60% of 60,000+6,000
$39,600
Trust fund
ER contribution :arrow_right:
Investment Income :arrow_right:
EE contributions:arrow_right: