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Pension Plans

Pension Plans. Some Basic Facts Regarding Different Types of Plans. Retirement Confusion How employers perceive workers’ understanding of retirement plan costs :. Understand Somewhat 58%. Don’t Know 7%. Don’t Understand At All 33%. Understand Very Well 2%.

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Pension Plans

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  1. Pension Plans Some Basic Facts Regarding Different Types of Plans

  2. Retirement Confusion How employers perceive workers’ understanding of retirement plan costs: Understand Somewhat 58% Don’t Know 7% Don’t Understand At All 33% Understand Very Well 2% Source: Hewett Associates, 2004 Survey of 138 employers USA Today Friday Nov. 10, 2006

  3. Defined Benefit Determined by formula Known benefit at retirement Employer risk Plans “back funded” Benefits older workers Guaranteed by PBGC Defined Contribution Individual account – determined by investment choice Employee risk Benefits younger workers Can be “transferred” No guarantee Plan Comparisons

  4. Cash Balance Plans • Defined benefit plan that has characteristics of defined contribution plan • Each year a participant’s account is credited with a “pay credit” and an “interest credit” • The “pay credit” is dependent upon the participant’s compensation • The growth of the account depends on pay credits that the employer contributes, not on profit sharing (may change) • Offers more portability than traditional pension plans since you can take your vested account as a lump sum whenever you terminate employment • Will not be reduced because of your age

  5. 1.0% .9 .8 .7 .6 .5 .4 .3 .2 .1 0 wearaway Value of cash balance accrual Value of traditional accrual (Defined Benefit Plan) Note “back-funding” • 27 29 31 33 37 39 41 43 45 47 51 53 55 57 59 61 63 65 • Age

  6. Pension Plan Legislation • Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA) • established rules for “top heavy” pensions • curbed inequities of only key employees as beneficiaries • 60% of benefits go to owners, officers, key employees • Retirement Equity Act of 1984 (REA) • improves likelihood of women receiving benefits • includes provisions to include: • how retiree chooses survivor benefits • how to account for breaks in service • how pension rights are assigned in divorce settlements

  7. Pension Plan Legislation • Tax Reform Act of 1986 (TRA) • limited benefits allowed in all plans that coordinate benefits or contributions with social security (integrated plans) • modified coverage and participation rules to expand number of workers participating in plans • imposed limit on annual compensation used to determine benefits or contributions

  8. Pension Benefit Guarantee Corporation (PBGC) • Created by the Employee Retirement Income Security Act (ERISA) of 1974 to encourage the continuation and maintenance of  private-sector defined benefit pension plans • Protects the retirement incomes of 44.1 million American workers in 30,330  private-sector defined benefit pension plans • Responsible for the current and future pensions of about 1,296,000 people in 3,595 pension plans that were recently terminated

  9. Pension Benefit Guarantee Corporation (PBGC) • Provides timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum • Collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over

  10. Pension Benefit Guarantee Corporation • Guarantees payment of retirees’ benefits in the event of a defined benefit plan termination – not retiree • The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly. For plans ended in 2005, workers who retire at age 65 can receive up to $3,801.14 a month ($45,613.68 a year) • The guarantee is lower for those who retire early or when there is a benefit for a survivor • The guarantee is increased for those who retire after age 65.

  11. Pension Benefit Guarantee Corporation (PBGC) • 1990 – PBGC announced that it does not cover insurance annuities purchased by pension plans • Annuities are periodic lifelong payments by insurance companies to retirees or their survivors • If insurance company fails – pensioners holding annuities must rely on various state insurance guarantee laws • Consider hurricanes Andrew, Hugo, Charlie, Francis, Ivan, Katrina • Consider 9/11 and other yearly tragedies

  12. Pension Benefit Guarantee Corporation (PBGC) • Most states continue payments to annuitants • Few states provide no guarantees • Colorado • Louisiana • New Jersey • District of Columbia • Some states limit amount of individual coverage • Example: California • guarantees no more than 80% of an annuity • limits total annuity coverage to $100K present value

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