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?