A pension plan fund is established for the eventual payment of retirement benefits. A plan sponsor is the entity that establishes the pension plan. A plan sponsor can be:
•A private business entity on behalf of its employees, called a corporate plan or private plan. •A federal, state, and local government on behalf of its employees, called a public plan. •A union on behalf of its called a Taft-Hartley plan.
•An individual, called an individually sponsored plan.
Two basic and widely used types of pension plans are defined benefit plans and defined contribution plans. In addition, a hybrid type of plan, called a cash balance plan, combines features of both pension plan types. In a defined benefit (DB) plan, the plan sponsor agrees to make specified dollar payments to qualifying employees beginning at retirement (and some payments to beneficiaries in case of death before retirement). Effectively, the DB plan pension obligations are a debt obligation of the plan sponsor and consequently the plan sponsor assumes the risk of having insufficient funds in the plan to satisfy the regular contractual payments that must be made to currently retired employees as well as those who will retire in the future. A plan sponsor has several options available in deciding who should manage the plan’s assets. The choices are:
•Internal management. The plan sponsor uses its own investment staff to manage the plan’s assets. •External management. The plan sponsor engages the services of one or more asset management companies to manage the plan’s assets. •Combination of internal and external management. Some of the plan’s assets are managed internally by the plan sponsor and the balances are managed by one or more asset management companies.
There is federal legislation that regulates pension plans—the Employee Retirement Income Security Act of 1974 (ERISA). Responsibility for administering ERISA is delegated to the Department of Labor and the...