Is Your Pension Plan Fully Funded?

by Investing School on March 4, 2013

Many companies offer their employees benefits that include a retirement plan. For that pension plan to be fully funded it has to have sufficient assets to provide for all the benefits owed to employees. That means that the plan has to be able to make all the anticipated disbursements when the time comes.

The administrator of the plan should be able to calculate the amount needed each year. This number will let him know if the pension plan is fiscally healthy and able to meet the demand. Since the plan is “fed” each year by employee contributions, that helps to ensure its financial stability. However, if those funds are used up immediately and there are none left to meet future needs the plan is not really fully funded.

There are reasons why a pension plan may be underfunded. Since most plans invest in stock, the vagaries of the market can cause significant losses to the holdings. Mergers may also create a situation where a pension plan is underfunded. Bankruptcy may completely deplete a plan although there is a government backed insurance plan for such situations. The best known underfunded pension plan is US Social Security.

Up to 40% of existing pension plans are currently fully funded; the rest are not. That means that individuals should be prepared for the possibility that they won’t be receiving what they think they will from their employer-based pension fund. In 2005 the US government allowed United Airlines to default on promises made regarding its pension plan. The result was that retirement pay was decreased by over 20% for some former employees.

Keep an eye on your company pension plan. If it is not fully funded on a regular basis make sure to invest as much as you can in your own retirement plans.

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