1. Chapter 8 – Pension Funds BA 543 Financial Markets and Institutions

2. Chapter 8 – Pension Funds Retirement Funds Pension Plan Sponsors Private Companies (corporate plans) Federal, State or Local Entities (public plans) Unions (Taft-Hartley plans) Individuals Funds provided by sponsors Funds provided by sponsors and beneficiaries Benefits Qualified plans grow tax deferred (individual) Vesting provides implicit employee loyalty (sponsor)

3. Chapter 8 – Pension Funds Plan Types Defined Benefit Company assumes risk of investment portfolio Future payments based on “formula” Benefits increase with years of service and pay Can be insured Defined Contribution Company promises “payments” into investment portfolio Individual assumes risk of investment portfolio Future payments based on value of portfolio and remaining life of individual

4. Chapter 8 – Pension Funds Some Common Plans Defined Contributions – Company Sponsored 401K 403B 457 SEPs (Simple) Individual Plans IRAs Roth IRAs

5. Chapter 8 – Pension Funds U.S. Regulation Employee Retirement Income Security Act of 1974 Funding Standards for Defined Benefit Plans Fiduciary Standards for Managers Vesting Standards  25% after five years  100% after ten years Established Pension Benefit Guaranty Corporation (required premiums from sponsors of plans) If you have a pension plan you must comply If you have a pension plan you must periodically report and disclosure statements must be filed with government agencies

6. Chapter 8 – Pension Funds Pension Fund Crisis Sponsors of Defined Benefit Plans Underfunded obligations Manipulated underfunding by using an unrealistic ROA for portfolio performance Creative Accounting Pension Funding Equity Act of 2004 Exacerbates the problem with allowing high discount rates Reduced reporting requirements Pension Protection Act of 2006 New rules on defined benefit plan contributions New rules on defined contribution plan enrollment and investing activities

7. Chapter 8 – Pension Plans Personal Financial Planning for Retirement What are the vehicles What are the rules When should investment take place How does one manage these plans Why is this important The Government Insurance Plan for Retirement Social Security Does it need fixing and if so, how?