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Lecture Risk management and insurance - Lecture No 30: Employee benefits: Retirement plans

This chapter’s objectives are to: Pension plans, traditional defined benefit pension, defined contribution pension, cash balance pension, plan qualification, eligibility, retirement ages, form of payment,. | Employee Benefits: Retirement Plans Lecture No. 30 1 2 Pension Plans An employer-sponsored arrangement Established with the primary goal of systematically providing retirement income for employees 3 Traditional Defined Benefit Pension A traditional defined benefit plan has a formula for determining the monthly pension payments during retirement Often, an employee’s salary history and number of years of service are inputs for the formula It is up to the employer to make sure that enough money has been set aside to fund the promised pension at the level indicated by the benefit formula 4 Defined Contribution Pension Employer’s annual contribution to the pension is specified The exact amount of eventual retirement benefit left undetermined until each person retires Contributions will be invested during the employee’s working career Pension amount will depend on level of yearly contributions and on investment return earned on the contributions Many employees favor these plans because it . | Employee Benefits: Retirement Plans Lecture No. 30 1 2 Pension Plans An employer-sponsored arrangement Established with the primary goal of systematically providing retirement income for employees 3 Traditional Defined Benefit Pension A traditional defined benefit plan has a formula for determining the monthly pension payments during retirement Often, an employee’s salary history and number of years of service are inputs for the formula It is up to the employer to make sure that enough money has been set aside to fund the promised pension at the level indicated by the benefit formula 4 Defined Contribution Pension Employer’s annual contribution to the pension is specified The exact amount of eventual retirement benefit left undetermined until each person retires Contributions will be invested during the employee’s working career Pension amount will depend on level of yearly contributions and on investment return earned on the contributions Many employees favor these plans because it is easier to budget the definite costs involved Many employees prefer knowing the value of their accounts throughout their working years Also, employees who anticipate changing jobs several times in their careers prefer these plans because accumulated amounts are usually easily cashed out or rolled over to a new employer’s plan 5 Cash Balance Pension Starting in the late 1990s, many large employers with traditional defined benefit pension plans begin converting them into cash balance pension plans They are still technically considered to be defined benefit plans for IRC purposes But they look like defined contribution pensions in many ways In particular, employees with cash balance pension plans have individual accounts that grow annually for both employer contributions and investment earnings 6 Cash Balance Pension The cash balance plan is utilized to address perceived problems with the other pension structures Many employees find defined benefit pensions difficult to understand .