A pension trust is an employee retirement trust that is funded by the employee and employer and managed by a trustee to provide financial security for employees after they retire.
The trustee of a pension trust is responsible for investing the funds, collecting earnings and interest, and distributing benefits to eligible employees.
The financial statements of the funds are prepared in accordance with general accounting principles.
Are there different types of pension trusts?
There are two types of pension trusts: defined contribution and defined benefit.
- Defined contribution: With this type of pension trust, the employer and the employee contribute a specific amount to the employee’s retirement account. The employee takes on the investment risk.
- Defined benefit: With this type of pension trust, the employer guarantees the employee a specific retirement income. The employer takes on the risk.
How does a defined benefit plan work?
A defined benefits pension plan is an employer-sponsored retirement plan that provides a guaranteed benefit for the employees.
The employee’s benefit is calculated based on salary, length of employment, and age. The formula may be based on a set dollar amount for every year worked or a specific percentage of their earnings.
The trust administrators hire actuaries to calculate this future benefit, and the employer is responsible for making annual contributions to the pension trust.
Once the employee retires, they receive a fixed, pre-established amount for the rest of their lives.
These plans are expensive for employers to maintain and are more complex than many other types of retirement plans.
How does a defined-contribution plan work?
A defined contribution plan is one in which the employees contribute a fixed amount or percentage of their paycheck. These contributions are typically on a tax-deferred basis. Their employers may match these contributions.
A pension trust may be used to hold employees’ retirement savings with a trustee overseeing the account.
What is the role of a pension funds trustee?
The pension funds trustee is responsible for ensuring the performance of the pension fund assets and that they can cover the employee benefits.
The trustee’s board is also accountable for the trust’s performance by virtue of its fiduciary responsibility.
This role is challenging because the trust’s sponsors are looking for certainty that the trust will be able to meet its financial obligations.
At the same time, global financial markets are unsettled.
Concerns about pension trusts
A combination of an aging population, a drop in birthrate, and the cost of administering a pension trust have led many employers to discontinue this benefit as it is unsustainable.
Pension plans can become under-funded due to the following:
- Poor investment returns
- Market instability
Another major threat to pension trusts is a company’s bankruptcy. If this should happen, the Pension Benefit Guaranty Corporation (PBGC) will take it over.
Concerns about an inability to sustain pension plans have led many employers to move to defined contribution plans, such as 401(k)s.
The burden of funding the plan and choosing the investments lies with the employee in these plans.
What is ERISA?
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law designed to protect retirement assets for American workers. It sets minimum standards for most retirement and health plans in the private sector.
ERISA sets rules and codes of conduct for administering pension trusts that trustees and other fiduciaries must follow. And it also requires that plan sponsors provide plan information to beneficiaries.
Retirement plans that comply with ERISA have certain rights and protections under the law. Participants are assured that their financial interests are protected.
What is vesting?
According to the Internal Revenue Service (IRS), vesting means that an employee has the right to own a certain percentage of their retirement account based on the number of years they have worked.
Once an employee is fully vested, they own 100% of their retirement account, and the employer cannot take it back. Vesting terms vary by employer. A person can be gradually vested, fully vested after reaching a certain number of years or immediately vested.
Employee contributions are 100% vested as soon as they are made.
Pension trusts are not as common as they were. However, if you have questions about your pension account or would like to discuss your retirement plans, schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.