2. Defined contribution plan
1. Under a defined benefit plan, the employer agrees to give retirees a specific defined benefit, such as $500 per
month, 80 percent of his or her average salary over the 5 years preceding retirement, or 2.5 percent of his or her
highest salary for each year of employment.
3. Under a profit sharing plan, the employer makes payments into the retirement fund that vary with the level of
4. The cash balance plan is a new type of retirement plan developed in the late 1990s. It is like a defined benefit
Chapter 29 Mini Case for Pension Plan Management
A. How important are pension funds to the U. S. Economy?
B. Define the following pension fund terms:
Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now considering expansion
throughout the region to take advantage of continued strong population growth. The company has been a "mom and pop"
operation supplemented by part-time workers, so it currently has no corporate retirement plan. However, the firm's owner,
Andy Johnson, believes that it will be necessary to start a corporate pension plan to attract the quality employees needed to
make the expansion succeed. Andy has asked you, a recent business school graduate who has just joined the firm, to learn
all that you can about pension funds, and then prepare a briefing paper on the subject. To help you get started, he sketched
out the following questions:
Pension funds constitute the largest class of investors. In 2011, the funds had assets of over $17.9 trillion and they owned
45% IRA assets. Thus, pension funds are a major force in the financial markets.
5. An employee is vested if he or she has the right to receive pension benefits even if they leave the company prior
6. A portable pension plan is one that an employee can carry from one employer to another. Portability is
7. If the present value of expected retirement benefits is equal to plan assets on hand, the plan is said to be fully
funded. If assets exceed the present value of benefits, then the plan is overfunded, while the plan is underfunded if
the present value of benefits exceeds assets. If the plan is underfunded, an unfunded pension liability is said to