6 min read•Last Updated on July 30, 2024
Pension plans are a crucial part of employee benefits, offering financial security in retirement. This section dives into two main types: defined benefit and defined contribution plans. Each has unique features, impacting both employers and employees differently.
Understanding these plans is key for grasping how companies manage retirement benefits. We'll explore the roles, risks, and responsibilities of both employers and employees in each type of plan, as well as their advantages and disadvantages.
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Topic 1: Governance of Pension Plans – Pension Finance and Management View original
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A 401(k) plan is a type of defined contribution retirement savings plan offered by employers that allows employees to save and invest a portion of their paycheck before taxes are taken out. This plan encourages employees to save for retirement by providing tax benefits and often includes employer matching contributions, which can significantly boost an individual's retirement savings. Contributions to a 401(k) are made through payroll deductions, and the investment grows tax-deferred until withdrawal during retirement.
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A 401(k) plan is a type of defined contribution retirement savings plan offered by employers that allows employees to save and invest a portion of their paycheck before taxes are taken out. This plan encourages employees to save for retirement by providing tax benefits and often includes employer matching contributions, which can significantly boost an individual's retirement savings. Contributions to a 401(k) are made through payroll deductions, and the investment grows tax-deferred until withdrawal during retirement.
Term 1 of 18
A 401(k) plan is a type of defined contribution retirement savings plan offered by employers that allows employees to save and invest a portion of their paycheck before taxes are taken out. This plan encourages employees to save for retirement by providing tax benefits and often includes employer matching contributions, which can significantly boost an individual's retirement savings. Contributions to a 401(k) are made through payroll deductions, and the investment grows tax-deferred until withdrawal during retirement.
Defined Contribution Plan: A retirement plan where the employee and/or employer contribute money to individual accounts, with benefits determined by the amount contributed and investment performance.
Employer Match: A contribution made by an employer to an employee's 401(k) plan, typically matching a certain percentage of the employee's own contributions.
Roth 401(k): A variation of the traditional 401(k) plan that allows employees to make after-tax contributions, providing tax-free withdrawals in retirement under certain conditions.
The discount rate is the interest rate used to determine the present value of future cash flows. It's crucial for valuing long-term liabilities like pension obligations and leases, as it impacts how much those future obligations are worth today. A higher discount rate results in a lower present value, which affects financial reporting and decision-making regarding employee benefits and lease agreements.
Present Value: The current worth of a future sum of money or stream of cash flows, discounted at the discount rate.
Pension Obligation: The total amount that a company is required to pay its employees upon retirement, which is influenced by the discount rate used in calculations.
Lease Liability: The obligation of a lessee to make lease payments, calculated by discounting future lease payments using the discount rate.
Funded status refers to the financial health of a pension plan, indicating whether the plan has sufficient assets to meet its future obligations to retirees. A plan is considered fully funded when its assets equal or exceed its liabilities; otherwise, it is underfunded. Understanding funded status is crucial as it impacts how companies report pension expenses, assess their long-term liabilities, and manage retirement benefits for employees.
Pension Obligation: The total amount a pension plan must pay to beneficiaries, representing the present value of future retirement benefits.
Actuarial Assumptions: Estimates used in the calculation of pension obligations, including mortality rates, interest rates, and employee turnover.
Other Postretirement Benefits (OPEB): Benefits provided to retirees other than pensions, such as healthcare, which also need to be funded and reported similarly to pensions.
Pension expense represents the total cost recognized by a company for providing pension benefits to its employees during a given period. This expense includes components such as service costs, interest costs, and any gains or losses from plan assets, and is critical for understanding the financial implications of employee retirement benefits.
Defined Benefit Plan: A retirement plan in which an employer promises a specified monthly benefit upon retirement, based on factors like salary history and duration of employment.
Defined Contribution Plan: A retirement plan where an employer, employee, or both make contributions on a regular basis, with the final benefit depending on investment performance.
Service Cost: The present value of benefits earned by employees for services rendered during the current period, which is a key component of pension expense.
Plan assets refer to the resources set aside within a pension or other postretirement benefit plan to cover future obligations to employees. These assets are crucial for ensuring that the plan can meet its promised benefits, which may include retirement payouts, healthcare coverage, or other postemployment benefits. The effective management and investment of these assets directly impact the financial health of the benefit plan, influencing both the employer's balance sheet and the employees' financial security in retirement.
pension obligation: The total amount that a company is required to pay to its employees upon retirement based on their salary and years of service.
actuarial assumptions: Estimates used by actuaries to predict future events affecting pension plans, including life expectancy, salary growth, and turnover rates.
funded status: The comparison between a plan's assets and its liabilities, indicating whether a pension plan is fully funded, underfunded, or overfunded.