In: Accounting
Items for Analysis: Amazon
Review your company’s liabilities to determine if it offers a pension plan or the notes to determine if provides postretirement benefits for its employees. Discuss the type of retirement plan the company provides and the overall impact of the plan on the financial statements. Would you want to work for that company based on the retirement plan it offers? How does each company comply with the rules as provided in the FASB Codification?
Pension plans impact the performance of a company in both direct and indirect ways. Directly, pensions have an influence on a business's financial statements, including the balance sheet. Companies are often responsible for partially funding pensions by contributing cash. Indirectly, the performance of a retirement plan can affect employee performance or the timing at which eligible individuals retire. There are different types of pensions for companies to choose from, and some businesses choose to offer employees more than one option
Types of Pensions
There are two primary types of pension fund structures in the United States: defined benefit and defined contribution. In the former, employees may contribute some earnings, but the burden for cash contributions is essentially on an employer. This approach allows the funding status, which is a measure of assets in relation to liabilities, to remain adequate. In a defined contribution structure, such as a 401(k) plan, employees are the primary contributors to the plan, although employers may agree to match cash deposits up to a certain level.
Regulation of Pensions
U.S. federal law dictates that corporations must make minimum cash contributions to pensions that are structured as defined benefit portfolios. This directly impacts a company's budgeting as well as its access to cash, which can influence the direction in which a business grows or shrinks. In 2012, amid a low-interest-rate environment in the economy, companies lobbied Congress for more flexibility in minimum deposit requirements. The federal government responded by lowering the threshold. This also had the effect of reducing corporate tax deductions on pension contributions, and thus increasing tax revenues, according to Buck Consultants.
Productivity
Retirement plans have the ability to bolster employee productivity, according to a study performed by pension consulting firm Towers Watson, which could impact a company's financials in a positive way. The study determines that workers consider retirement packages valuable. In fact, the more importance that employees place on pensions, the less turnover there is likely to be in an organization. A proper pension plan has the potential to draw new talent and also motivate aging employees to retire, ultimately making room for a new generation of workers.
Pension Liabilities
When a company does not have the funds to cover its pension liabilities, it could cause severe consequences. In the United States, pension insurance provider the Pension Benefit Guaranty Corporation (PBGC) can intervene and salvage defined benefit plans of struggling or even bankrupt companies, which could reduce corporate bankruptcies. In 2012, the PBGC did just that when it inherited the United Way for Southeaster Michigan's pension plan. The nonprofit organization was able to continue and the PBGC paid retiring employees full pension benefits.
A defined-benefit retirement plan, also called a pension plan, is one of two types of qualified retirement plans protected under the Employee Retirement Income Security Act of 1974. In a defined-benefit plan, a formula that combines salary and service determines each participant's benefit in the plan, which is an annuity from retirement until the participant or the participant's spouse dies, whichever is later. An employer bears the full responsibility for paying its pension obligations and investing its pension funds. ERISA requires companies to place their pension assets into a separate trust to protect them from being used for other purposes.
Pension Trust Fund
The pension trust fund that holds the assets of a defined-benefit pension plan is a separate legal entity from the plan sponsor. A company can take a tax deduction for the amount it contributes to the trust, the investment earnings in the trust are tax-free and employees don't have to pay any tax on the contributions made to the trust on their behalf until they receive the money. By law, the funds in the trust can only be used to pay retiree pensions and retiree healthcare expenses. The trust must provide an annual report with a detailed financial accounting of the trust's funds to the Department of Labor and to plan participants.
Trustees and Fiduciaries
A board of trustees typically governs the pension trust fund. Trustees oversee the management and investment of the funds in the trust. They are automatically defined as fiduciaries of the pension plan. Under ERISA, a fiduciary is anyone who exercises authority or control in managing or spending the assets of the plan, anyone who provides investment advice on the plan assets for a fee and anyone else with discretionary responsibility in administering the plan. Fiduciaries can be held personally liable for a breach in fiduciary responsibility and can face criminal sanctions such as fines and imprisonment for misusing funds.
Fiduciary Responsibility
ERISA defines four standards of conduct for plan fiduciaries: loyalty, prudence, diversification and compliance. Loyalty obligates fiduciaries to make sure the assets of the trust are used for the exclusive benefit of the plan participants. Prudence requires care, skill and diligence in decision-making regarding the plans' assets, including their investment. Diversification requires fiduciaries to diversity the investments in the plan to avoid large losses. Compliance obligates fiduciaries to comply with the specifics of the plan documents unless they conflict with ERISA. Fiduciaries can be sued under ERISA for breaching their fiduciary responsibility.
Other Protections
Placing plan assets in a trust is only one protection that ERISA provides to defined-benefit plan participants. ERISA requires companies to fully fund their defined-benefit plans based on an actuary's determination of the plan's future pension obligations. If the company has an investment loss, it must contribute additional funds to make up for the loss. If a company enters into bankruptcy, ERISA places the funds in the trust out of the reach of creditors. The law also established the Pension Benefit Guaranty Corporation, which guarantees every retiree the amount of his accrued benefit in a defined-benefit plan, up to certain limits. Every defined-benefit plan pays a flat per-participant fee each year to the PBGC to fund this guarantee.