Retirement Planning and Employee Benefits for Financial PlannersPowerPoint PresentationDefined Benefit Pension PlanPension Plan RequirementsMandatory FundingDisallowance of In-Service WithdrawalsLimited Investment in Employer SecuritiesLimited Investment in Life Insurance412(i) PlansDefined Benefit vs. Defined Contribution Pension PlansActuaryCalculation of Annual Funding based on assumptions regarding:Slide 13Investment RiskAllocation of ForfeituresPension Benefit Guaranty Corporation (PBGC)Defined Benefit Pension PlansAccrued Benefit vs. Account BalanceCredit for Prior ServiceSocial Security IntegrationSlide 21Summary of Defined Benefit vs. Defined Contribution Pension PlansDefined Benefit PlansDefined Benefit Pension Plan BenefitsSlide 25Cash Balance Pension PlansSlide 27Slide 28Slide 29Cash Balance Pension Plans controversySlide 31Cash Balance Pension PlansMoney Purchase Pension PlansTarget Benefit Pension Plan1Retirement Planning and Employee Benefits for Financial PlannersChapter 4: Qualified Pension Plans2© 2007 ME™ - Your Money Education Resource™Pension Plans (4 Types) Defined Benefit Pension Plans Cash Balance Pension Plans Money Purchase Pension Plans Target Benefit Pension PlansDefined Benefit Pension Plans (2 Types)Defined Contribution Pension Plans(2 Types)See page 1273© 2007 ME™ - Your Money Education Resource™Defined Benefit Pension PlanDisappearing112,208 plans in 198522,697 plans in 2013Imperfect stormLow interest ratesLengthening life expectancyDecade of below average equity returns with increased volatilityAfter 2006, must report pension liability on balance sheet4© 2007 ME™ - Your Money Education Resource™Pension Plan RequirementsMandatory FundingDisallowance of Most In-Service WithdrawalsLimited Investment in Employer SecuritiesLimited Investment in Life Insurance5© 2007 ME™ - Your Money Education Resource™Mandatory FundingThe amount that must be contributed to a pension plan by the employer each plan year.Defined Benefit Pension PlansThe plan sponsor must fund the plan on an annual basis with an amount within the actuaries calculated funding range.Pension Protection Act of 2006 requires plans to be fully funded on an ongoing basis starting in 2008If not fully funded as of 2008, seven years to catch up fundingImpact on terminations???Defined Contribution Pension PlansThe plan sponsor must fund the plan annually with the amount defined in the plan document.6© 2007 ME™ - Your Money Education Resource™Disallowance of In-Service WithdrawalsIn-Service Withdrawal – Any withdrawal from a pension plan while the employee is a participant in the plan other than a loan.The participant of a pension plan cannot take an in-service withdrawal from the pension plan.Under the PPA 2006, defined benefit pension plans can now provide for in-service distributions to participants who are age 62 or older.7© 2007 ME™ - Your Money Education Resource™Limited Investment in Employer SecuritiesLimit of 10% investment of pension plan assets in employer securities.In addition, the PPA 2006 requires defined contributions plans holding publicly traded employer securities to allow plan participants to diversity their contributions.Protects the ability of the plan to pay the promised retirement benefit.8© 2007 ME™ - Your Money Education Resource™Limited Investment in Life InsuranceLimited to providing incidental death benefits.Cannot be the primary focus of the qualified plan.Plan must pass either one of the:25% Test100 to 1 ratio test9© 2007 ME™ - Your Money Education Resource™412(i) PlansA specific type of defined benefit pension plan that is funded entirely by a life insurance contract or annuity.Employer claims tax deduction for contributions made to pay premiums.10© 2007 ME™ - Your Money Education Resource™Defined Benefit vs. Defined Contribution Pension PlansPrimary differences:The use of an actuary.Assumption of the investment risk.Allocation of plan forfeitures.Coverage under the PBGC.Use of Social Security Integration.Accrued Benefit versus Account Balance.Credit for Prior Service.Commingled versus Separate Accounts.11© 2007 ME™ - Your Money Education Resource™ActuaryDetermine required plan funding range.AssumptionsSee Exhibit 4.4, page 149.Required AnnuallyDefined Benefit Pension PlanCash Balance Pension PlanRequired at InceptionTarget Benefit Pension PlanNo other plans require an actuary.12© 2007 ME™ - Your Money Education Resource™Calculation of Annual Funding based on assumptions regarding:AssumptionsInflation: COLA costsSocial security vs. State of IllinoisWagesLife ExpectancyInvestment ReturnsIn 2002 GM assumed 10%, actual -5.2%In 2003 Ford assumed 8.8%; actual 17%MortalityForfeitures13© 2007 ME™ - Your Money Education Resource™Calculation of Annual Funding based on assumptions regarding:Can a pension plan become overfunded?In 2003, GM expected returns of $6.4 billion from pension investmentsActual return $13.5 billion14© 2007 ME™ - Your Money Education Resource™Investment RiskDefined Benefit PlansInvestment Risk with EmployerDefined Contribution PlansInvestment Risk with Employee15© 2007 ME™ - Your Money Education Resource™Allocation of ForfeituresForfeitures – The unvested amount of a participant’s benefit at his termination of service with the plan sponsor.Allocation of forfeituresDefined Benefit PlansReduce future plan costs for the employerDefined Contribution PlansReduce future plan costs for the employer, orAllocate to other plan participants (nondiscriminatory).16© 2007 ME™ - Your Money Education Resource™Pension Benefit Guaranty Corporation (PBGC)A federal corporation that acts as an insurance provider to maintain the benefits promised to employees by their defined benefit pension plans.Plan sponsors pay premiums for the insurance coverage.PBGC maximum annual benefit is $59,320 for 2014.If retiring at age 65May be much less than plan providedEmployers pay premiums to PBGC17© 2007 ME™ - Your Money Education Resource™Defined Benefit Pension PlansProvides a specific amount of benefit at the plan’s specified retirement