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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
Introduction
The Basics of Defined Benefit Plans
What 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 Plans
What 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 Funding
How 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 Plans
What 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 Assets
How 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?
Introduction
The 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.
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