Definition
Funded Pension Plan: A pension plan wherein enough funds are currently available to pay out all future retirement benefit claims.
Meaning
A funded pension plan involves setting aside funds today in an amount deemed sufficient to cover all future liabilities to retirees. This ensures that when retirement benefits come due, there will be adequate financial resources to meet these obligations without seeking additional funding.
Etymology
The term “funded” derives from the financial world, indicating that something is done “with funds at hand.” “Pension plan” originates from the Latin “pensio,” meaning “payment,” referring to regular payments made during retirement.
Background
Primarily used as a matter of policy in both private and public sectors, a funded pension plan contrasts with “unfunded” or “pay-as-you-go” plans, where future liabilities are met by current contributions rather than accrued investments. Regulations surrounding funded pension plans often ensure fiduciary responsibility and protection for future retirees.
Key Takeaways
- Security: Ensures financial resources are available for future retirements.
- Performance: Relies on appropriate investment strategies to maintain funding.
- Management: Subject to regulatory oversight to safeguard beneficiaries’ interests.
- Comparison: Different from unfunded pension plans, offering more immediate financial reassurance.
Differences and Similarities
Differences
- Funded: Assets are pre-accumulated and invested.
- Unfunded: Benefits are paid from current revenues or contributions.
Similarities
- Objective: Both aim to provide retirement income.
- Structure: Managed through a mix of contributions and benefit formulas.
Synonyms
- Fully-funded pension plan
- Well-funded pension
Antonyms
- Unfunded pension plan
- Pay-as-you-go plan
Related Terms with Definitions
- Actuarial Valuation: The assessment of the value of pension liabilities and the adequacy of plan assets.
- Pension Fund: The investment pool where pension contributions are held and managed.
- Defined Benefit Plan: A type of pension plan where benefits are defined based on a formula, usually involving years of service and salary.
Frequently Asked Questions
What is the main advantage of a funded pension plan?
A funded pension plan provides financial security by ensuring that funds are available to meet future retirement benefits.
How is the adequacy of funds in a funded pension plan determined?
Adequacy is typically determined through regular actuarial valuations, accounting for various future obligations and investment returns.
Are funded pension plans subject to regulation?
Yes, they are heavily regulated to protect the interests of beneficiaries and ensure fiduciary responsibility.
Exciting Facts
- The total assets in funded pension plans globally exceed $35 trillion, indicating the significant role they play in financial markets.
- The concept dates back to the 19th century, with some of the oldest plans established in the U.S. rail industry.
Quotations from Notable Writers
“A funded pension plan is the bedrock of retirement security, grounded in fiscal discipline and fiduciary prudence.” — Jane Doe, Financial Author
Proverbs
“Save for the future, and the future will save you.”
Humorous Sayings
“A funded pension plan is like a backup bread loaf—there when you loaf off into retirement!”
Related Government Regulations
- Government Pension Offset (GPO): Limits on certain federal pension plans.
- ERISA (Employee Retirement Income Security Act): U.S. regulation governing private sector pensions ensuring fiduciary principles.
Suggested Literature and Other Sources for Further Studies
- The Pension Answer Book by Stephen J. Krass
- Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation Approaches by Bernard Langer
Quizzes
Published on October 5, 2023, by Alex Murray.
In time, all promises kept; may your financial future be secure and your retirement days merry and bright. Cheers! 🎉
