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The Resource for the Global Finance Profession

The Basics of Pension Plans Regulated by ERISA

Answers to the questions most frequently asked about the liabilities, funding, regulations, and investment of private trusteed pension plans in the United States

October, 2001 

Table of Contents 


The Basics of Defined Benefit PlansWhat are ERISA-regulated pension plans and welfare benefit plans?
What are the assets of pension funds in the United States?
How many people are covered by pension plans in the United States?
What are private trusteed plans and private insured plans? 

Types of Pension PlansWhat are the types of private trusteed pension plans?
What is a defined benefit plan?
What is a defined contribution plan?
What is the primary difference between a defined contribution plan and a defined benefit plan?
What risks are borne by participants in defined contribution and defined benefit plans?
How does the risk to the employer differ with a defined contribution plan vs. a defined benefit plan?
What are some of the current areas of interest in private pension plan design?
What are "hybrid" plans?
What is the difference between a cash balance plan and a pension equity plan?
Why would an employer with an existing defined benefit plan choose a hybrid plan instead of a defined contribution plan if a change is contemplated? 

Pensions Liabilities and FundingHow is a defined benefit pension plan accounted for in company financial statements?
How is a defined benefit pension plan funded?
What is the PBGC?
Why do employee pension plans receive deferred tax treatment? 

Regulation of Defined Benefit PlansWhat are the primary aspects of pension plan regulation under ERISA?
What is a fiduciary?
What are the basic fiduciary standards for defined contribution and other retirement plans?
What is a prohibited transaction?
Are there exemptions to prohibited transactions?
What sanctions are imposed by ERISA on fiduciaries that do not meet their responsibilities?
How do funding and vesting provisions affect plan administration?
How does ERISA affect corporate governance issues?
What reporting and disclosure requirements are established by ERISA?
What is the basic nondiscrimination rule?
What is the definition of Highly Compensated Employees (HCEs)?
What are the minimum coverage requirements?
What are private plan terminations and what is required of the employer in a termination?
What are plan reversions? 

Investment of Defined Benefit Plan AssetsHow well funded are private defined benefit pension plans?
What broad rules govern the investment of employee benefit assets?
How do fiduciaries assure prudence in the creation of an investment program?
How is risk reduced by investment diversification?
What is the investment horizon of the typical defined benefit plan?
What are derivatives?
How are derivatives used in pension funds? 

IntroductionThe ability of the private trusteed pension plans in the U.S. to meet their current obligations, fund future obligations, comply with regulations, and invest prudently is a matter of ongoing interest among employers, regulators, participants and beneficiaries, Congress, the media, and the general public.  The Committee on the Investment of Employee Benefit Assets (CIEBA) of the Association for Financial Professionals has published this overview in order to support reasoned discussion of these issues by providing answers to the questions most frequently asked about private trusteed plans.

CIEBA is a nationally recognized voice for those corporate financial officers who administer and manage, as fiduciaries, the investment of funds for employee and welfare benefit plans regulated under the Employee Retirement Income Security Act (ERISA).  As of Fall, 2001, CIEBA's 120 members collectively managed $1 trillion in assets for 15 million participants including both union and non-union employees and retirees and their beneficiaries.

The Association for Financial Professionals in Bethesda, Maryland, supports more than 14,000 individual members from a wide range of industries throughout all stages of their careers in various aspects of treasury and financial management. AFP is the preferred resource for financial professionals for continuing education, financial tools and publications, career development, certifications, research, representation to legislators and regulators, and the development of industry standards.

CIEBA wishes to thank the Employee Benefit Research Institute (EBRI), the Groom Law Group and Bernstein Research for providing portions of the supporting data in this publication.



bulletTable of Contents 

bulletPensions Liabilities and Funding 


bulletRegulation of Defined Benefit Plans 

bulletThe Basics of Defined Benefit

bulletInvestment of Defined Benefit Plan Assets 

bulletTypes of Pension Plans 







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