IFM10 Ch30 Lecture

IFM10 Ch30 Lecture - Chapter30 PensionPlanManagement 1...

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1 Chapter 30 Pension Plan Management
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2 Topics in Chapter Pension plan terminology Defined benefit versus defined  contribution plans Pension fund investment tactics Retiree health benefits
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3 How important are pension  funds? They constitute the largest class of  investors. They hold about 33% of all U. S. stocks.
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4 Pension Plan Terminology Defined benefit plan:  Employer agrees to  give retirees a specific benefit, generally a  percentage of final salary. Defined contribution plan:  Employer agrees  to make specific payments into a retirement  fund, frequently a mutual fund.  Retirees’  benefits depend on the investment  performance of their own fund. 401(k) is the  most common type. (More. ..)
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5 Profit sharing plan:  Employer payments  vary with the firm’s profits. (Defined  contribution, but as a percentage of  profits). Cash balance plan:  Employer promises  to put a specified percentage of the  employee’s salary into the plan, and to  pay a specified return on the plan’s  assets. (More. ..)
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6 Vesting:  Gives the employee the right  to receive pension benefits at retirement  even if he/she leaves the company  before retirement. Deferred vesting:  Pension rights are  not vested for the first few years. Portability:  A “portable” pension plan  can be moved to another employer if  the employee changes jobs. (More. ..)
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7 Fully funded:  Value of plan assets  equals the present value of expected  retirement benefits. Underfunded:  Plan assets are less than  the PV of the benefits.  An “unfunded  liability” is said to exist. Overfunded:  The reverse of  underfunded. (More. ..)
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8 The actuarial rate of return is the rate of  return: used to find the PV of expected benefits  (discount rate). at which the fund’s assets are assumed to  be invested. (More. ..)
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Employee Retirement Income Security  Act (ERISA):  The federal law governing  the administration and structure of  corporate pension plans. (More.
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This note was uploaded on 04/08/2011 for the course FIN 360 taught by Professor Smith during the Spring '10 term at Park.

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IFM10 Ch30 Lecture - Chapter30 PensionPlanManagement 1...

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