The Employee Retirement Income Security Act of 1974 (ERISA) was passed in order to protect the retirement assets of employees that were accrued through employer-sponsored pension plans. In defined contribution plans, retirement assets are invested and will increase or decrease as the investments increase or decrease. With defined benefit plans, the retirement plan sponsor promises to pay a certain amount to a plan participant upon retirement, whether a stated dollar figure or an amount that is calculated from the participant's salary and time of service to the employer.
To protect defined benefit plans, ERISA established the Pension Benefit Guaranty Corporation to insure plan assets in the event that a pension plan is terminated after the sponsoring company becomes insolvent and can no longer fund the plan or if the plan's assets are lost through negligence or malfeasance. The PBGC is run by an executive director and board of directors chaired by the Secretary of Labor and that also includes the Secretary of Commerce and the Secretary of the Treasury.
The PBGC is funded with insurance premiums that are paid by employers that sponsor insured pension plans. It also receives some income from investments and from plans that it has taken over after the sponsor terminated the plan. The insurance premium paid by a multi-employer pension plan is $2.60 per employee or retiree. Single-employer plans pay $19 per employee or retiree and an additional $9 per $1,000 of unfunded vested benefits in the plan.
The PBGC provides separate insurance programs for single-employer pension plans and multi-employer pension plans. Multi-employer pension plans are plans established through collective bargaining agreements and are funded by more than one employer, although in general the employers are from the same industry. The PBGC's single-employer program insures the pension benefits of almost 35 plan participants that are covered by nearly 30,000 different plans. The multi-employer program insures almost 10 million employees and retirees in 1,600 plans.
An employer-sponsored pension plan may be terminated voluntarily whether or not the company is in financial distress and whether or not the plan is properly funded. However, if the plan is properly funded, the sponsor is required to pay out all of the benefits due or purchase annuities to cover benefits to be paid in the future, whereupon the PBGC's insurance responsibilities end without further involvement. Such a termination is called a "standard termination." If the sponsor company is in financial distress and the plan is not properly funded, the company may conduct a "distress termination" after it demonstrates its financial condition under criteria established by the PGBC. In addition, under certain circumstances in which a plan demonstrates that it is not properly funded or cannot pay benefits currently due, the PBGC will initiate an involuntary termination.
The PBGC manages over 3,000 pension plans that were terminated by their sponsor companies or by PBGC initiative. It pays pension benefits to some 450,000 former pension plan participants and manages the retirement assets of an equal number of current employees who have not yet retired. The maximum benefit that PBGC will pay is set by law and is adjusted annually. For 2004, former plan participants may receive as much as $44,000 per year, assuming retirement at age 65. The maximum benefit is lower for early retirees and participant beneficiaries and survivors of plan participants and is higher for participants who retire after age 65.
Copyright 2009 LexisNexis, a division of Reed Elsevier Inc.
