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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”
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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
Pension Benefit Guarantee Corporation • PBGC was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of private-sector defined benefit pension plans • The Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of 44.1 million American workers in 30,330 private-sector defined benefit pension plans • PBGC is responsible for the current and future pensions of about 1,296,000 people in 3,595 pension plans that ended • .
Pension Benefit Guarantee Corporation • Provides timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum. • PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over
Pension Benefit Guarantee Corporation • 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.
Pension Benefit Guarantee Corporation • 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 • limit total annuity coverage to $100K present value or
Pension Benefit Guarantee Corporation • Per ERISA, PBGC is to guarantee payment of retirees’ benefits in the event of a plan termination • PBGC covers defined benefit retirement plan – not retiree • 1990 – PBGC announced that it does not cover insurance annuities (periodic lifelong payments by insurance companies to retirees or their survivors) purchased by pension plans • If insurance company fails – pensioners holding annuities must rely on various state insurance guarantee laws • 3 – 4 million retirees in • Hurricane Andrew, Hugo, Charlie, Francis, Ivan, Katrina
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 • 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
1.0% .9 .8 .7 .6 .5 .4 .3 .2 .1 0 Value of cash balance accrual Value of traditional accrual • 27 29 31 33 37 39 41 43 45 47 51 53 55 57 59 61 63 65 • Age
