OK, first let’s keep this post as “untechnical” as possible. In a traditional pension plan, the employee earns a year of service and, after a typical 30 year employment, is provided a pension for life. The most important aspect of this process is the continued existence of the employer. The employing organization is typically the source for 75% to 80% of the fund’s contributions. If the employer goes bankrupt promised pension benefits are doubtful. But–and this is the part that few businesses get right–the employer’s continued existence is dependent on proper management of their cash. If the employer puts too much money into the pension plan and not enough into the business the employer will eventually fail–and so will the pension plan. So the issue is simply this: how much to deposit into the plan each year so that a balance is maintained in the pension fund and the needs of the business? The answer is a lot simpler than you might expect….the general rule is that the pension plan fund should always be large enough to pay on-going and future benefits for at least 15 years. The advisors for these plans will promote a far higher fund balance but it is a waste of a company’s resources to dump money into the plan beyond the 15 year time horizon. NEXT TIME: MORE INFO ON THIS ASPECT AND HOW POOR JUDGEMENTS CAN ADVERSELY IMPACT EMPLOYEES.
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