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Chapter Eighteen

Chapter Eighteen. Pension Funds. Pension Funds Overview. Pension funds offer tax-deferred savings plans First established in 1759 American Express established the first corporate pension fund in 1875 By 1940, only 400 pensions funds were in existence

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Chapter Eighteen

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  1. Chapter Eighteen Pension Funds McGraw-Hill/Irwin

  2. Pension Funds Overview • Pension funds offer tax-deferred savings plans • First established in 1759 • American Express established the first corporate pension fund in 1875 • By 1940, only 400 pensions funds were in existence • Currently there are over 700,000 pension funds; 30.9% of household fin. assets are in pension funds McGraw-Hill/Irwin

  3. Pension Funds, Two Distinct Sectors • Private pension funds • funds administered by a private corporation (e.g., insurance company, mutual fund) • Public pension funds • funds administered by a federal, state, or local government (e.g., Social Security) McGraw-Hill/Irwin

  4. Pension Fund Reserves, 1990-2002 ($Bn.) McGraw-Hill/Irwin

  5. Insured versus Noninsured Pension Funds • Pension plan • Insured pension plan • Noninsured pension plans McGraw-Hill/Irwin

  6. Defined Benefit versus Defined Contribution Pension Funds • Defined benefit pension • Flat benefit formula • Career average formula • Final pay formula • Defined contribution benefit plan McGraw-Hill/Irwin

  7. Private Pension Funds • Created by private entities • Increasingly dominated by defined contribution plans • Types of private pension plans • 401(k) • individual retirement accounts (IRA’s) • Keogh accounts McGraw-Hill/Irwin

  8. Assets in 401 (k) Plans ($Bns) McGraw-Hill/Irwin

  9. Public Pension Funds • State or local government pension funds • set up for state or local government employees • funded on a “pay as you go” basis • Federal government pension funds - two types • federal government employees, civil service employees, military and railroad employees not covered by SS • Social Security - funded on a “pay as you go” basis McGraw-Hill/Irwin

  10. Financial Asset Investments • Private pension funds • the largest institutional investor in the U.S. stock market • totaled $4,444.4 billion in 2004 of which 64.34% is invested in corporate equities or equity mutual funds • Public pension funds • state and local pension funds held most of their assets in corporate equities (58.13% in 2004) • Social security contributions are invested in relatively low-risk, low-return Treasury securities McGraw-Hill/Irwin

  11. Financial Assets in Defined Benefit Funds McGraw-Hill/Irwin

  12. Financial Assets in Defined Contribution Pension Funds McGraw-Hill/Irwin

  13. Regulation of Pension Funds • Employee Retirement Income Security Act (ERISA) of 1974 • Funding • Vesting of Benefits • Fiduciary Responsibilities • Transferability • Insurance McGraw-Hill/Irwin

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