BP Amoco Case
1. In a defined-contribution (DC) pension plan, the employee or employer, or both, make regular contributions to the plan. In the US, employees typically set aside a predetermined percentage of their earnings which is deposited to the plan and the employer will match that contribution. Ultimately, the amount of money available to the individual upon retirement is determined by the performance of their investments. Each employee retains the option to choose how to diversify their investments, while the employer will typically provide a “default allocation” option. The options available are generally very varied, and includes a number of index funds and actively managed mutual funds.
In a defined-benefit (DB) pension plan, the retiree is paid a fixed amount per month upon retirement. That amount is calculated based on a formula that takes into account the employee’s past earnings, age and tenure. In this system, the employer assumes the risk while employee bear no risk. Funding comes from both employees and employers, and the fund can be managed internally or by an external fund manager, or a combination of both.
2. Amoco offered index-oriented investment options to its employees. These investments, known as core investment options, were designed for Amoco employees and managed by professionals in a daily and passive fashion. This index funds had lower management costs. The average expense ratio for the indexed funds in the Amoco plan was 10 basis points. In addition, Amoco offered its employees externally managed index funds for US equities, long-term bonds, and US money market instruments. Amoco also offered a balanced indexed fund that mixed these three domestic asset groups plus international equities in a diversified portfolio. US Savings Bonds were offered to Amoco employees as well. State Street Bank provided the trustee and record keeping services. In the years before the merger, Amoco included an international equity index fund, a mid-capitalization
In a defined-benefit (DB) pension plan, the retiree is paid a fixed amount per month upon retirement. That amount is calculated based on a formula that takes into account the employee’s past earnings, age and tenure. In this system, the employer assumes the risk while employee bear no risk. Funding comes from both employees and employers, and the fund can be managed internally or by an external fund manager, or a combination of both.
2. Amoco offered index-oriented investment options to its employees. These investments, known as core investment options, were designed for Amoco employees and managed by professionals in a daily and passive fashion. This index funds had lower management costs. The average expense ratio for the indexed funds in the Amoco plan was 10 basis points. In addition, Amoco offered its employees externally managed index funds for US equities, long-term bonds, and US money market instruments. Amoco also offered a balanced indexed fund that mixed these three domestic asset groups plus international equities in a diversified portfolio. US Savings Bonds were offered to Amoco employees as well. State Street Bank provided the trustee and record keeping services. In the years before the merger, Amoco included an international equity index fund, a mid-capitalization