What Does Plan Sponsor Mean?

The entities that establish pension plans, called plan sponsor, may be private business
entities acting for their employees called corporate or private plans; federal state, and
local entities on behalf of their employees called public plans; union on behalf of their
members called Taft Hartly plans and individual for themselves called individual
sponsored plans. A designated party, usually a company or employer that sets up a
healthcare or retirement plan such as a 401(k) for the benefit of the organization's
employees. The responsibilities of the plan sponsor include determining membership
parameters, investment choices and, in some cases, providing contribution payments in
the form of cash and/or stock
A plan sponsor is an entity that establishes and manages some type of retirement,
investment, or healthcare plan as a means of providing benefits to members or
employees. In many cases, the sponsor is a business that partners with service providers
to offer employees easy access to health insurance or some type of pension plan
Organizations such as labor unions or local entities like private clubs may also create and
sponsor plans that are designed to benefit members of those organizations.

When attempting to create some sort of benefit package for members or employees, a
plan sponsor will often consider the underlying reasons for providing those benefits. In
the case of businesses, the motivation is often to provide incentives that encourage fully
trained and reliable employees to remain with the firm for longer periods of time. When
and as possible, those benefits are provided with as little expense to the employee as
possible. For example, a small business may sponsor a health insurance plan and pay the
entire monthly premium for a single employee, while splitting the cost with an employee
who desires family coverage. While the employee does pay a portion for that family
coverage, the total paid under the group insurance plan is usually considerably less than
he or she would pay for family coverage with a personal health insurance plan.

A trade union may also function as a plan sponsor. It is not unusual for unions to offer
pension plans, or at least savings plans that offer a competitive rate of interest. Plans of
this type are often desirable, since they remain intact when a member of the union moves
from one employer to another, eliminating the need to roll over or convert an existing
benefit.

In some cases, an association will provide benefits of some sort, such as health coverage.
This is particularly true of associations that provide support to small businesses, or to
people who operate home businesses, or work as freelances for a variety of clients.
Generally, the fees that the members pay for access to any benefits offered by the plan
sponsor is much less than they would pay if securing those same types of benefits on their
own. Whether the plan sponsor is a large corporation providing incentives to employees,
or a local association that is seeking to provide benefits at competitive prices to members,
the sponsor will often evaluate numerous plans before settling on those that provide the
most benefit to its constituents. Along with sponsoring the plans, the sponsor may be
actively involved in the management and administration of those plans, as well as
constantly considering additional benefits that can be added to the overall structure of the
current plan.

What is an insured pension plan?

A plan sponsor establishing a defined benefit plan can use the payments made into the
fund to purchase an annuity policy from a life insurance company. Defined benefit plans
that are guaranteed by life insurance products are called insured benefit plans. An insured
plan is not necessarily safer than a noninsured plan, since it depends on the ability of the
life insurance company to make the contractual payments, whereas the uninsured plan
depends on the ability of the plan sponsor. Whether a private pension plan is insured or
noninsured, a federal agency, the Pension Benefit Guaranty Corporation, which was
established in 1974 by the ERISA legislation, insures the vested benefits of participants.
Benefits become vested when employees reach a certain age and complete enough years
of service so that they meet the minimum requirements for receiving benefits upon
retirement. The payment of benefits is not contingent upon a participant’s continuation
with the employer or union.

What is the function of the pension benefit guaranty corporation?

The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the
United States government that was created by the Employee Retirement Income Security
Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private
defined benefit pension plans, provide timely and uninterrupted payment of pension
benefits, and keep pension insurance premiums at the lowest level necessary to carry out
its operations.

The PBGC administers separate insurance programs to protect participants in single-

employer and The PBGC was established by the Employee Retirement Income Security
Act (ERISA) of 1974 to protect participants in defined benefit pension plans from plan
terminations that do not have sufficient assets to pay promised benefits. While PBGC is a
government corporation, it is not formally backed by the full faith and credit of the U.S.
government, nor does it receive any federal tax money, although it does have a line of
credit from the U.S. Treasury. The PBGC operates as a self-funded corporation that
derives its financial resources from four sources: insurance premiums paid to the
corporation by defined benefit pension sponsors; assets of pension plans that the pension
insurer has assumed from terminated plans; recoveries in bankruptcy from former plan
sponsors; and earnings on invested assets.
When PBGC terminates a pension plan, it pays benefits to pensioners according to the
provisions of the plan up to PBGC maximum guarantees. This includes early retirement,
disability, and survivor benefits. Under the single employer program, the PBGC limit is
adjusted annually based on changes in Social Security contributions and benefit bases.
For plans with a 1998 termination date, the maximum annual guarantee is $34,568 for a
single life annuity beginning at age 65. The PBGC also conducts a "Pension Search"
program which locates people who are owed benefits from terminated fully funded,
PBGC-insured defined benefit plans. The agency also offers an "Early Warning" program
to target underfunded plans posing the greatest risk of pension fund termination.

A number of studies have applied contingent claims techniques to value pension

insurance. (2) Most of these studies assume that the term to maturity of the PBGC's
insurance guarantee is known. In other words, the date at which a firm's pension plan
could be terminated and, if underfunded, the PBGC would experience a claim is
nonrandom. This is a convenient assumption since it allows PBGC insurance to be valued
in a manner similar to that of a standard (European) put option.(3) In practice, however,
the PBGC's insurance terminates in a possible claim when the sponsoring firm enters
bankruptcy, a date that is likely to be highly uncertain at the time the PBGC first commits
to insuring a firm's pension liabilities. A notable exception to studies that assume a
nonrandom termination date is the work of Marcus (1987). Marcus made an important
contribution to valuing pension insurance by linking the guarantee to both the financial
condition of the pension fund and the financial condition of the sponsoring firm. Thus, he
was able to incorporate the likelihood of firm bankruptcy in valuing pension insurance

Pension Protection Act of 2006

The Pension Protection Act of 2006 represents the most significant pension legislation
since ERISA. Some of the provisions of the Act that affect the PBGC include:

• The methodology for calculating the "variable-rate" PBGC premium is changed.

• The PBGC's guarantee of pension benefits that become payable on a plant
shutdown is limited.
• If the PBGC takes over a terminated plan, employees' pension benefits are frozen
as of the date of the plan sponsor's bankruptcy filing (which may be months or
even years before the plan terminates).
• The complicated rules that govern the PBGC's pension guarantee for business
owners are simplified.
• If the PBGC takes over a terminated plan, the plan sponsor is required to pay a
"termination premium" of $1,250 per participant per year for three years.
Discuss ERISA prudent man rule

The Employee Retirement Income Security Act (ERISA) applies a revised and restated
version of the prudent man rule to pension and profit sharing portfolios. ERISA requires
that a fiduciary manage a portfolio 'with the care, skill, prudence, and diligence, under the
circumstances then prevailing, that a prudent man acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of a like character and with
like aims.' This statement differs from the classic prudent man rule in that familiarity with
such matters suggests a higher standard than simple prudence-hence the name, prudent
expert rule. Other provisions of the law and United States Department of Labor
regulations suggest a portfolio approach under which a position imprudent in isolation
may be acceptable in a portfolio context. See also Employee Retirement Income Security
Act (ERISA), Prudent Man Rule.

The prudent man rule is only 42 words long, but is the parent of scores of litigated cases
and millions of words of analysis. Despite this volume of information, the rule still
creates confusion and discomfort. That is doubly true in the context of participant-
directed plans. In this column, we offer a primer on what it means to be prudent, focusing
on the selection and monitoring of investments. (This is by no means a complete
discussion of the concept of prudence, but the steps discussed in this column are some of
the most important. Fiduciaries who fail to act prudently are personally liable to make
good on any losses sustained by the plan, including lost earnings.

As stated in the prudent man rule, found in ERISA Section 404(a)(1)(B), fiduciaries must
act:

With the care, skill, prudence and diligence under the circumstances then prevailing that
a prudent man acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like aims.

Q. 11 What are the similarities between the problems faced by the Social Security
systems in the United States and in Germany?

"One of America's most important institutions - a symbol of the trust between generations
- is also in need of wise and effective reform. Social Security was a great moral success
of the 20th Century, and we must honor its great purposes in this new century. The
system, however, on its current path, is headed toward bankruptcy. And so we must join
together to strengthen and save Social Security."

A Social Security System designed for a 1935 world does not fit the needs of the 21st
Century. Social Security was designed in 1935 for a world that is very different from
today. In 1935, most women did not work outside the home. Today, about 60% of
women work outside the home. In 1935, the average American did not live long enough
to collect retirement benefits. Today, life expectancy is 77 years.
Social Security will not be changed for those 55 or older. Today, more than 45 million
Americans receive Social Security benefits and millions more are nearing retirement. For
these Americans, Social Security benefits are secure and will not change in any way.

Social Security is making empty promises to our children and grandchildren. For our
younger workers, Social Security has serious problems that will grow worse over time.
Social Security cannot afford to pay promised benefits to future generations because it
was designed for a 1935 world in which benefits were much lower, life-spans were
shorter, there were more workers per retiree, and fewer retirees were drawing from the
system.

With each passing year, there are fewer workers paying ever-higher benefits to an ever-
larger number of retirees. Social Security is a pay-as-you-go system, which means taxes
on today's workers pay the benefits for today's retirees. A worker's payroll taxes are not
saved in an account with his or her name on it for the worker's retirement.

Social Security is heading toward bankruptcy. According to the Social Security Trustees,
thirteen years from now, in 2018, Social Security will be paying out more than it takes in.
And, when today's young workers begin to retire in 2042, the system will be exhausted
and bankrupt. If we do not act now to save it, the only solution will be drastically higher
taxes, massive new borrowing, or sudden and severe cuts in Social Security benefits or
other government programs.

As of 2004, the cost of doing nothing to fix our Social Security system had hit an
estimated $10.4 trillion. The longer we wait to take action, the more difficult and
expensive the changes will be. Every year we wait costs an additional $600 billion.
Today's 30-year-old worker can expect a 27% benefit cut from the current system when
he or she reaches normal retirement age. And, without action, these benefit cuts will only
get worse.

In the State of the Union Address, President Bush called for an open, candid review of
the options to strengthen Social Security permanently for our children and grandchildren.

The President believes that we must move ahead with reform, because our children's
retirement security is more important than partisan politics.

Q. 12 Why are many Japanese corporate pension funds currently underfunded?

For many decades, workers have relied on the security that they would retire with a
reasonable pension, and that amount, usually paid on a monthly basis, was not subject to
change. Companies made certain that money would exist to pay pensions, by fully
funding their pension plans. A fully funded pension plan is one where the company has
100% of the money needed to cover current pensions and those that will be paid out in
the future.
As the economy took a downturn in the late 1990s, many companies sought to provide
more spendable cash by creating an underfunded pension plan, where the money to cover
all pensions owed currently, or in the future was not available. Essentially
the liabilities of the underfunded pension plan exceeded its assets, changing the profile of
the retiree significantly. For many people, this result in no surety that they will get the
pension they were promised or for those who are retired, it may cause a significant drop
in current pension distribution amounts.

There are several reasons why an underfunded pension plan may exist or why one may
become underfunded. Many pension plans invest in stock, and if stock investments result
in huge losses, this can mean a plan becomes underfunded. Pensions that are in savings
accounts have suffered from low interest rates, which mean they are not accumulating the
interest they need to be fully funded. Alternately, mergers might create an underfunded
pension plan, and bankruptcy can completely eliminate a plan. Current US laws favor
paying debtors before employees who are due a pension. The burden of paying retirement
benefits then falls to the American taxpayer in the form of Social Security payments,
which itself is underfunded and set to expire if laws are not changed. The US doesn’t
presently collect enough to keep Social Security fully funded.

There have been some extreme examples of the way an underfunded pension plan can
dramatically affect the retirement income of certain workers. In 2005, a federal
court allowed United Airlines to default on its underfunded pension plan. Retirement pay
for workers, especially pilots, dropped sharply. Some were receiving as much as $12,000
US Dollars (USD) per month and saw this amount drop to $2000 USD. In other
companies, pensions drop by a few hundred dollars a month, but this can still
dramatically affect ability to live well or survive if pension income is small.

It’s estimated that only about 30-40% of pension plans are now fully funded, which
means that people should take action by preparing for retirement without including what
they may get in future pensions. Some companies have already taken this step by
allowing people access to 401k investments, and using matching funds. They essentially
privatize the pension system, and if workers make sound investments, they may have
significant funds to cover retirement. Individuals may also set up their own retirement
plans through IRAs and the like to help cover drops in income or possible defaults on
pension.