PENSIONS By: Richard Hurst
Questions <ul><li>What is a pension? </li></ul><ul><ul><li>What is the history of pensions? </li></ul></ul><ul><ul><li>Wha...
Pensions <ul><li>Pension : an arrangement to provide a person with an income when he/she is no longer earning a regular in...
History of Pensions <ul><li>1789: Federal government offered the first pensions to disabled veterans after the Revolutiona...
History of Pensions (cont’d) <ul><li>1963: Studebaker terminated its underfunded defined benefit pension, leaving roughly ...
History of Pensions (cont’d) <ul><li>Employee Retirement Income Security Act </li></ul><ul><ul><li>Enacted to protect the ...
History of Pensions (cont’d) <ul><li>Pension Benefit Guaranty Corporation </li></ul><ul><ul><li>Created by the Employee Re...
Types of Pension Plan <ul><li>Defined Benefit Plans </li></ul><ul><li>Defined Contribution Plans </li></ul><ul><li>Hybrid ...
Defined Benefit Plans <ul><li>Determines benefits upon retirement based on a set formula, using factors such as salary his...
Defined Benefit Plans (cont’d) <ul><li>Vesting:  </li></ul><ul><ul><li>Cliff Vesting – You own 100% of your pension benefi...
Defined Benefit Plans (cont’d) <ul><li>Cons: </li></ul><ul><ul><li>Much of the value of the benefit is earned in the final...
Defined Contribution Plans <ul><li>Contribution is defined and set by the employer (or employee), and placed into an accou...
Defined Contribution Plans (cont’d) <ul><li>401(k)’s </li></ul><ul><ul><li>Must be sponsored by an employer </li></ul></ul...
Defined Contribution Plans (cont’d) <ul><li>Individual Retirement Accounts (IRAs): the largest component of total retireme...
Hybrid Plans <ul><li>Combines the benefits of Defined Benefit and Defined Contribution plans </li></ul><ul><li>Treated as ...
Hybrid Plans (cont’d) <ul><li>Cash Balance Plan </li></ul><ul><ul><li>Promises an employee an employer contribution equal ...
Pensions in the News <ul><li>Funding of Top 100 pension sponsors fell by $303 billion in 2008 </li></ul><ul><li>Because of...
Pensions in the News (cont’d) <ul><li>DB Plans can put a huge burden on companies </li></ul><ul><li>If a company goes bank...
Social Security <ul><li>Setup by FDR as part of the New Deal </li></ul><ul><li>In 1945, the number of covered workers per ...
How much is enough?
How much is enough?
How much is enough? <ul><li>Plan for roughly 10% of your income to go to a retirement plan with each paycheck </li></ul><u...
How much is enough? <ul><li>AARP Retirement Calculator </li></ul><ul><ul><li>Life Expectancy: 75 (Males), 80 (Females) </l...
Works Cited <ul><ul><li>2008 RCS Fact Sheet: Saving for Retirement in America . 9 Apr. 2008. Employee Benefit Research Ins...
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Pension Plans

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  • Pension Plans

    1. 1. PENSIONS By: Richard Hurst
    2. 2. Questions <ul><li>What is a pension? </li></ul><ul><ul><li>What is the history of pensions? </li></ul></ul><ul><ul><li>What options are available? </li></ul></ul><ul><li>How has the current economic crisis affected pensions? </li></ul><ul><li>How much is needed for retirement? </li></ul>
    3. 3. Pensions <ul><li>Pension : an arrangement to provide a person with an income when he/she is no longer earning a regular income through employment </li></ul><ul><li>Annuity : an investment on which one receives fixed payments for a lifetime or for a specific number of years </li></ul>
    4. 4. History of Pensions <ul><li>1789: Federal government offered the first pensions to disabled veterans after the Revolutionary War </li></ul><ul><li>1857: First municipal pension was established in New York City for police officers </li></ul><ul><li>1875: First corporate pension offered by American Express </li></ul><ul><li>1896: First statewide legislation for pensions established in New Jersey for teachers </li></ul>
    5. 5. History of Pensions (cont’d) <ul><li>1963: Studebaker terminated its underfunded defined benefit pension, leaving roughly 11,000 employees without anything </li></ul><ul><li>1974: In response to Studebaker fraud and default, Congress passed the Employee Retirement Income Security Act (ERISA) </li></ul>
    6. 6. History of Pensions (cont’d) <ul><li>Employee Retirement Income Security Act </li></ul><ul><ul><li>Enacted to protect the interests of employee benefit plan participants </li></ul></ul><ul><ul><li>Regulates the operation of a pension plan once it has been established </li></ul></ul><ul><ul><li>Provides fiduciary responsibilities for those who manage and control plan assets </li></ul></ul><ul><ul><li>Established the Pension Benefit Guaranty Corporation to ensure benefits in terminated Defined Benefit plans </li></ul></ul>
    7. 7. History of Pensions (cont’d) <ul><li>Pension Benefit Guaranty Corporation </li></ul><ul><ul><li>Created by the Employee Retirement Income Security Act of 1974 </li></ul></ul><ul><ul><li>Ensures payment of Defined Benefit pension benefits only </li></ul></ul><ul><ul><li>Collects premiums from corporations to ensure funds </li></ul></ul><ul><ul><li>As of 2009, it ensures up to $4,500 per month for plans that terminated in 2008 </li></ul></ul>
    8. 8. Types of Pension Plan <ul><li>Defined Benefit Plans </li></ul><ul><li>Defined Contribution Plans </li></ul><ul><li>Hybrid Plans </li></ul>
    9. 9. Defined Benefit Plans <ul><li>Determines benefits upon retirement based on a set formula, using factors such as salary history, years of employment, and retirement age </li></ul><ul><li>Employer holds all of the risk </li></ul><ul><li>Easier to plan income upon retirement </li></ul><ul><li>Most administratively complex and costly type of plan </li></ul>
    10. 10. Defined Benefit Plans (cont’d) <ul><li>Vesting: </li></ul><ul><ul><li>Cliff Vesting – You own 100% of your pension benefit after you’ve participated in the plan for 5 years </li></ul></ul><ul><ul><li>Graded Vesting – You own a certain percentage of your benefit plan, which increases each year. For example, after 3 years, you own 20%, and 20% more each year after that. This is the Federal minimum. </li></ul></ul>
    11. 11. Defined Benefit Plans (cont’d) <ul><li>Cons: </li></ul><ul><ul><li>Much of the value of the benefit is earned in the final years prior to retirement (focuses on staying with one employer your whole life) </li></ul></ul><ul><ul><li>Little to no control over the funds </li></ul></ul><ul><ul><li>No payout until retirement age is reached </li></ul></ul>
    12. 12. Defined Contribution Plans <ul><li>Contribution is defined and set by the employer (or employee), and placed into an account </li></ul><ul><li>Employee holds all of the risk </li></ul><ul><li>Hard to plan retirement income </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Individual Retirement Accounts (IRA’s) </li></ul></ul><ul><ul><li>401(k)’s </li></ul></ul>
    13. 13. Defined Contribution Plans (cont’d) <ul><li>401(k)’s </li></ul><ul><ul><li>Must be sponsored by an employer </li></ul></ul><ul><ul><li>Tax is not paid on the money contributed to the plan </li></ul></ul><ul><ul><li>Employees choose a portion of their paycheck to be redirected to the plan </li></ul></ul><ul><ul><li>A number of investment options are available, including mutual funds </li></ul></ul><ul><ul><li>For 2009, the maximum contribution allowed is $16,500 </li></ul></ul>
    14. 14. Defined Contribution Plans (cont’d) <ul><li>Individual Retirement Accounts (IRAs): the largest component of total retirement assets; accounted for $3.7 trillion in 2008 </li></ul><ul><ul><li>Traditional IRA – Contributions are tax deductible; upon withdrawal, the funds are taxed as ordinary income </li></ul></ul><ul><ul><li>Roth IRA – Contributions are made on an after tax basis, with earnings growing tax-free </li></ul></ul><ul><ul><li>SIMPLE IRA – Similar to a 401(k) plan, but easier to manage and not as expensive </li></ul></ul>
    15. 15. Hybrid Plans <ul><li>Combines the benefits of Defined Benefit and Defined Contribution plans </li></ul><ul><li>Treated as Defined Benefit plan for tax purposes, and the risk is held by the employer </li></ul><ul><li>Plans are expressed in terms of an account balance, like a Defined Contribution plan </li></ul><ul><li>Example: </li></ul><ul><ul><li>Cash Balance Plan </li></ul></ul>
    16. 16. Hybrid Plans (cont’d) <ul><li>Cash Balance Plan </li></ul><ul><ul><li>Promises an employee an employer contribution equal to a percent of each year's earnings and a rate of return on that contribution </li></ul></ul><ul><ul><li>Good for employees that switch jobs often – you can leave current assets in the plan, choose an annuity, or roll over the balance into their next employer’s plan or into an IRA </li></ul></ul>
    17. 17. Pensions in the News <ul><li>Funding of Top 100 pension sponsors fell by $303 billion in 2008 </li></ul><ul><li>Because of downturn in stock market, companies are forced to contribute more money to keep them fully funded </li></ul>
    18. 18. Pensions in the News (cont’d) <ul><li>DB Plans can put a huge burden on companies </li></ul><ul><li>If a company goes bankrupt, PBGC takes over the plan </li></ul><ul><li>Seen as a way by investors to increase company value almost instantly </li></ul>
    19. 19. Social Security <ul><li>Setup by FDR as part of the New Deal </li></ul><ul><li>In 1945, the number of covered workers per beneficiary was 41.9, in 2007 it was 3.3 </li></ul><ul><li>Expected to exceed income from taxes in 2017, and the fund is expected to be exhausted by 2041 </li></ul><ul><li>Current monthly income from Social Security is $1,079 for single, $1,722 for a couple </li></ul>
    20. 20. How much is enough?
    21. 21. How much is enough?
    22. 22. How much is enough? <ul><li>Plan for roughly 10% of your income to go to a retirement plan with each paycheck </li></ul><ul><li>By age 50, the amount of money you have contributed should equal 10 times the amount you expect to withdraw each year in retirement </li></ul><ul><li>Things to consider for retirement: </li></ul><ul><ul><li>What age will I retire? </li></ul></ul><ul><ul><li>How many years do I expect to live after retirement? </li></ul></ul><ul><ul><li>What lifestyle will I live during retirement? What will that cost? </li></ul></ul>
    23. 23. How much is enough? <ul><li>AARP Retirement Calculator </li></ul><ul><ul><li>Life Expectancy: 75 (Males), 80 (Females) </li></ul></ul><ul><ul><li>Current Annual Salary: Expected income upon graduation </li></ul></ul><ul><ul><li>Annual Inflation: 3.5% </li></ul></ul><ul><ul><li>Monthly Contributions: 10% of expected income </li></ul></ul><ul><ul><li>Investment Returns: 5% (Modest return) </li></ul></ul><ul><ul><li>Annual Social Security: $1,079 </li></ul></ul>
    24. 24. Works Cited <ul><ul><li>2008 RCS Fact Sheet: Saving for Retirement in America . 9 Apr. 2008. Employee Benefit Research Institute. 20 Mar. 2009 <http://www.ebri.org/files/RCS08_FS2_Saving.pdf>. </li></ul></ul><ul><ul><li>Block, Sandra, and Sue Kirchhoff. Largest U.S. pension plans' assets fall $217 billion short . 12 Mar. 2009. USA Today. 18 Mar. 2009 <http://www.usatoday.com/money/perfi/retirement/2009-03-11-pension-plan-assets-short_N.htm>. </li></ul></ul><ul><ul><li>Choosing A Retirement Plan . Internal Revenue Service. March 18, 2009 < http://www.irs.gov/retirement/article/0,,id=108950,00.html> </li></ul></ul><ul><ul><li>Clark, Robert L., and Ann A. McDermed. The Choice of Pension Plans in a Changing Regulatory Environment . Washington, DC: American Enterprise Institute, 1990. </li></ul></ul><ul><ul><li>How much should I invest? AARP. 20 Mar. 2009 <http://www.aarpfinancial.com/content/Learning/retPlanning_howMuchInvest.cfm>. </li></ul></ul><ul><ul><li>IRS. 21 Mar. 2009 <http://www.dol.gov/dol/topic/health-plans/erisa.htm>. </li></ul></ul><ul><ul><li>Lowenstein, Roger. &quot;The End of Pensions.&quot; 30 Oct. 2005. New York Times. 18 Mar. 2009 <http://www.nytimes.com/2005/10/30/magazine/30pensions.html?scp=3&sq=pensions&st=cse>. </li></ul></ul><ul><ul><li>Modern Pensions and Social Security: A Timeline of Historic Events . 16 Oct. 2006. Society of Actuaries. 19 Mar. 2009 <http://www.soa.org/files/pdf/027bk_rev-annual06.pdf>. </li></ul></ul><ul><ul><li>&quot;Pensions.&quot; Wikipedia. 10 Mar. 2009 <http://en.wikipedia.org/wiki/Pension#United_States>. </li></ul></ul><ul><ul><li>Pension Benefit Guaranty Corporation . Wikipedia. 20 Mar. 2009 <http://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation>. </li></ul></ul><ul><ul><li>Retirement Confidence Surveys . 19 Mar. 2009. Employee Benefit Research Institute. 23 Mar. 2009 <http://www.ebri.org/publications/facts/index.cfm?fa=fastFacts>. </li></ul></ul><ul><ul><li>Roth IRA . Wikipedia. 13 Mar. 2009 <http://en.wikipedia.org/wiki/Roth_ira>. </li></ul></ul><ul><ul><li>The Basics of Social Security . Apr. 2008. Employee Benefit Research Institute. 18 Mar. 2009 <http://www.ebri.org/pdf/publications/facts/0408fact.pdf>. </li></ul></ul><ul><ul><li>Traditional IRA . Wikipedia. 13 Mar. 2009 <http://en.wikipedia.org/wiki/Traditional_IRA>. </li></ul></ul><ul><ul><li>Walsh, Mary W. Whoops! There Goes Another Pension Plan . 18 Sept. 2005. The New York Times. 12 Mar. 2009 <http://www.nytimes.com/2005/09/18/business/18pensions.html?_r=1&scp=1&sq=whoops%20there%20goes%20another%20pension%20plan&st=cse>. </li></ul></ul><ul><ul><li>What PBGC Guarantees . Pension Benefit Guaranty Corporation. 20 Mar. 2009 <http://www.pbgc.gov/workers-retirees/benefits-information/content/page13181.html>. </li></ul></ul><ul><ul><li>Wise, David A., ed. Pensions, Labor, and Individual Choice . Chicago: The University of Chicago P, 1985. </li></ul></ul>

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