Introduction to US Employer-Sponsored Defined Benefits Plans
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A retirement plan is designed to supplement an employee's own savings (and Social Security) to provide income, medical, and life insurance benefits after ceasing to work. For employers, the reasons for a pension plan are more complex than simply providing enough funds for retirement. Employers use different formulas to capture various segments of employees' pay to reflect their pension provisions, and make annual contributions to the trust to make sure that pension plans are well funded. To regulate the employer-sponsored pension market, the government has introduced multiple regulations, including the Employee Retirement Income Security Act of 1974 (ERISA), the Pension Protection Act of 2006 (PPA), and the recently passed Moving Ahead for Progress in the 21st Century (MAP-21). A special government agency, the Pension Benefit Guaranty Corporation (PBGC) has also been created to safeguard the benefits of employees in case companies go bankrupt or are unable to fulfill their obligations. Since the most recent global financial crisis, we have experienced a significant decrease in returns among all investments, which has caused many pension plans to be underfunded. In this study, I will cover most of the topics above as well as explain the active roles of retirement actuaries in this special economic condition and how they are helping plan sponsors to reduce liabilities and risks.