Question

Pension Funds that are defined contribution plans ___________________________________.

	A.	Are used solely by government=sponsored pension plans
	B.	Were banned by ERISA
	C.	Are typically underfunded
	D.	Are increasingly dominating the private pension fund market

Answer 1

Pension funds that are defined contribution plans are increasingly dominating the private pension fund market because of the following reasons:

In a defined-contribution plan, the employer makes specific plan contributions for the worker, usually matching to varying degrees the contributions made by the employees. The final benefit received by the employee depends on the plan's investment performance: The company’s liability to pay a specific benefit ends when the contributions are made.

Because this is much less expensive than the traditional pension, when the company is on the hook for whatever the fund can't generate, a growing number of private companies are moving to this type of plan and ending defined-benefit plans. The best-known defined-contribution plan is the 401(k), and the plan's equivalent for non-profits' workers, the 403(b).

In common parlance, "pension plan" often means the more traditional defined-benefit plan, with a set payout, funded and controlled entirely by the employer.

Some companies offer both types of plans. They even allow employees to roll over 401(k) balances into their defined-benefit plans.

There is another variation, the pay-as-you-go pension plan. Set up by the employer, these tend to be wholly funded by the employee, who can opt for salary deductions or lump sum contributions (which are generally not permitted on 401(k) plans). Otherwise, they similarly to 401(k) plans, except that they usually offer no company match.

Pension Plan: Factoring in ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law designed to protect the retirement assets of investors, and the law specifically provides guidelines that retirement plan fiduciaries must follow to protect the assets of private-sector employees.

Companies that provide retirement plans are referred to as plan sponsors (fiduciaries), and ERISA requires each company to provide a specific level of plan information to employees who are eligible. Plan sponsors provide details on investment options and the dollar amount of worker contributions that are matched by the company, if applicable. Employees also need to understand vesting, which refers to the dollar amount of the pension assets that are owned by the worker; vesting is based on the number of years of service and other factors.

Pension Plan: Vesting

Enrollment in a defined-benefit plan is usually automatic within one year of employment, although vesting can either be immediate or spread out over seven years. Limited benefits are provided, and leaving a company before retirement may result in losing some or all of an employee’s pension benefits.

With defined-contribution plans, your individual contributions are 100% vested as soon as they reach your account. But if your employer matches those contributions or gives you company stock as part of your benefits package, it may set up a schedule under which a certain percentage is handed over to you each year until you are "fully vested." Just because retirement contributions are fully vested doesn’t mean you’re allowed to make withdrawals, however.

Pension Plan: Are They Taxable?

Most employer-sponsored pension plans are qualified, meaning they meet Internal Revenue Code 401(a) and Employee Retirement Income Security Act of 1974 (ERISA) requirements. That gives them their tax-advantaged status. Employers get a tax break on the contributions they make to the plan for their employees. So do employees: Contributions they make to the plan come "off the top" of their paychecks—that is, are taken out of their gross income.