Discuss the role that pension funds play in company pension plans
#1. Discuss the role that pension funds play in company pension plans. What benefits accrue to companies who elect to use pension funds? How does the use of a pension fund change the accounting that must be done with respect to employee pension amounts?
Student Response
#2. Pension plans are retirement plans that employers make contributions to in order to help set aside money for their employees retirement benefit. Pension plans allow to make their own contributions to their retirement benefit as well. Most pension plans however, require employees to stay with the company for a particular amount of time in order for the plan to go into affect. 401k plans allow employee the ability to invest their money in many different companies. Preparing the financial statements and keeping records is part of the employers responsibility which is also known as accounting for the employee benefit plan. Employees get to reap the benefits of gain from the assets they have contributed to the plan. The employer has an annual cost that they are obligated to contribute to the plan. If for some reason the contribution isn’t fully met by the employer a liability must be recorded on the balance sheet, but if the contribution is more than required an asset can be reported.
#3. Today’s job market has gotten away from the typical pension plans and have moved more towards the 401(k) retirement plans. The 401(k) gives the employee more flexibility with investing and the plans are portable from one employer to the another. However, there are some disadvantages that employees need to consider when investing in a 401(k) plan. With a pension plan, this is a guaranteed payment from the employer and 401(k)s are not guaranteed. Pension plans are protected from market crashes whereas 401(k) are not protected. It is easier to budget with a pension plan because the payment received remains the same. It is difficult to budget with a 401(k) because the payment is adjusted according to the market. More and more companies are offering 401(k) plans to their employees. This is simply because it takes the responsibility of payments off the employer to the employee.
Companies that offer pension plans required the employee to remain employed typically five years to become fully vested. After five years of service an employee is able to leave and receive 100% of what has been invested. However if the employee terminates employment before the five year requirement they could potentially lose the entire amount that was invested. Since 401(k) plans can be transferred between employers there is no time limit but there is also no guaranteed there will be a retirement nest egg.
Reference:
Carey, M. (2017, June 5). 5 ways a 401(k) isn’t as good as a pension. Retrieved from https://www.forbes.com/sites/mattcarey/2017/06/05/5-ways-a-401k-isnt-as-good-as-a-pension/#40632944567f
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