A corporate pension plan is set up between a company and its employees or its employee union, specifically for the purpose of allowing money to be set aside for the employee’s retirement. The specific details of these plans vary, depending on the particular plan that has been set up by an employer. Money can be placed into these plans in a number of different ways, both by the employee as well as by the employer. The employer’s contributions are generally set up according to a pre-designated plan, which is often determined at least in part by the employee’s length of employment as well as their position and work. Although these plans used to be customarily contributed to wholly by the employer, almost all corporate pension plans now assume that the employee themselves will also be contributing to the plan over the course of their career with the company.
What are the different types of corporate pension plans?
Although the details of these plans vary, there are two basic kinds of corporate pension plans. Some of these plans are defined benefit, while others are defined contribution plans. In the case of a defined benefit plan, the retirement benefits that an employee qualifies for is calculated according to a specific formula. This formula is determined by a number of factors, both on the side of the employee as well as the employer. On the employee’s side, the formula takes into consideration the length of the person’s employment, as well as their salary history. On the employer’s side, the contributions are determined by the company’s ability to have the money needed in order to properly fund the pension plan. In the case of a defined contribution plan, there isn’t a guarantee on the amount of money that will be available at the time of retirement. This is because the plan payout for defined contribution plans is completely dependent upon the success of the investment plan itself, so varying results can be expected and should be planned for. Defined contribution plans are becoming much more common among corporations, because defined benefit plans can often put a financial strain on a corporation. Instead of guaranteeing a certain level of funds to provide for the former employee’s financial requirements for the rest of their life, as would be the case with a defined benefit plan, a defined contribution plan will simply provide whatever amount is in the plan at the point of retirement. This can be a much more manageable situation for the employer as compared to the relative unknown total payout for a defined benefit plan.
Can corporate pension plans be underfunded?
In recent years, a bad economy and problems in the stock market have caused underfunding situations in some company pension plans. Especially if companies were depending on high returns for their plan’s investments instead of making direct contributions to the plans, shortfalls may have occurred. In order to fix the problem of underfunding, companies are required to make significant contributions to their pension plans. The company’s goal, of course, is to have their corporate pension plan fully funded.
