Q: We're thinking about adding a pension plan for employees. Why are they so unpopular these days?
A: Pension plans are generally designed to provide a regular, annual income to employees and their spouses during retirement. They also can prevent an employee from taking his or her retirement benefits in one lump sum and spending it all at once. So, for the paternalistic employer, pension plans are a good fit.
The 2007-08 market crash highlighted the risk of pension plans: funding. An actuary estimates the contributions needed to fund plan benefits based on assumptions, including assumptions regarding investment return and mortality age of plan participants and their spouses. If plan investments underperform the assumptions, the employer's contribution obligations increase.
Similarly, if employees and spouses live longer than mortality assumptions, the employer's contribution obligations increase. So, while pension plans provide a more certain retirement income for employees, under the traditional pension plan model employers may end up with higher funding obligations than originally anticipated.
However, if you are interested in starting a pension plan, but are not interested in the funding risk, certain insurance products are designed to eliminate all or a portion of that risk. These products often are based on conservative investment and mortality assumptions, and so may require higher initial contributions. An insurance broker specializing in retirement funds can advise you.
Alternatively, you may wish to consider variations on the traditional pension plan, such as a variable annuity plan, which shifts risk to employees. An actuary specializing in pension plans can advise you on these types of alternatives.
Q: Do we really have to buy the ERISA fidelity bond?
A: Yes, ERISA bonding is required by law. There are exceptions; however, none for law firms. The amount is generally 10 percent of plan assets handled and at least $1,000, but not more than $500,000 ($1 million if the plan holds employer securities).
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