ASSET MANAGEMENT / RETIREMENT FUNDS 
TYPES OF RETIREMENT PLANS

There are two basic types of pension funds: defined benefit and defined contribution plans. In a defined benefit plan, the income the employee receives in retirement is guaranteed, based on predetermined benefits formulas. A person’s earnings and number of years with the company may affect the benefits received. In a defined contribution plan, a type of savings plan in which taxes on earnings are deferred until funds are withdrawn, the amount of retirement income depends on the contributions made and the earnings generated by the securities purchased. The employer generally matches the employee contribution up to a certain level and the employee selects investments from among the options the employer’s plan offers.

The Individual Retirement Account (IRA) is a tax-deductible savings plan for those who are self-employed, or whose earnings are below a certain level or whose employers do not offer retirement plans. Other types of retirement funds include profit-sharing and Keogh plans for the self-employed and employees of small businesses. Some people not in these categories may make limited IRA contributions on a tax-deferred basis. The Roth IRA, a special kind of retirement account created in 1997, may offer greater tax benefits to certain individuals.
DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS, 1990-2005 (1)

(Percent)








Defined benefit pension plans35%21%19%20%21%21%
Defined contribution plans343636404242

(1) All private industry.

Source: U.S. Bureau of Labor Statistics.

DEFINED BENEFIT PLAN FORMULAS

Retirement benefits under defined pension plans vary, depending on the formula used to determine the benefits. Typically, benefits are based on a percentage of the participant’s “terminal earnings,” i.e., earnings at retirement. Several other options have been developed (see Appendix page __.)
DEFINED BENEFIT PLANS: PRIMARY FORMULA, ALL EMPLOYEES, 2003 (1)



(1) All private industry. Does not add to 100 percent due to rounding.

Source: National Compensation Survey, 2003, U.S. Bureau of Labor Statistics.


  • Among those workers covered by a defined benefit plan, the share of cash balance plans rose from 4 percent in 1997 to 21 percent in 2003.

  • 28 percent of workers in service-producing industries covered by a defined benefit plan were in cash balance plans, compared with 8 percent of workers in goods-producing industries.

RETIREMENT FUNDS ASSET MIX, 2005



Source: Securities Industry Association.

  • In defined benefit plans, the share of investments in bonds rose from 2004 to 2005, while the share of investments in equities decreased.

INVESTMENT MIX OF PRIVATE DEFINED BENEFIT PLAN ASSETS, 2001-2005

($ billions)








2001$724$459$149$162$192$1,686
20024574751311671801,409
20036434881851691951,680
20047205132061722001,811
20056855241941761901,769

Source: Securities Industry Association.

INVESTMENT MIX OF PRIVATE DEFINED CONTRIBUTION PLAN ASSETS, 2001-2005

($ billions)








2001$838$141$714$141$397$2,231
20026401486211463441,900
20038491528091473922,347
20049711609681494142,662
20051,0411701,0581534222,844

Source: Securities Industry Association.

PENSION BENEFIT GUARANTY CORPORATION

The Pension Benefit Guaranty Corporation (PBGC), a federal corporation created by the Employee Retirement Income Security Act of 1974, protects the pensions of over 44 million workers in about 31,000 private defined benefit plans through two separate insurance programs: a single-employer plan termination insurance program and a multi-employer plan. In 2005 Congress passed landmark pension reform legislation to close shortfalls in employers’ funding of defined benefit pension plans. The act requires employers to fully fund their plans in seven years, but gives some airlines in bankruptcy proceedings an extra 10 years to meet their obligations. The law also removes legal barriers to some cash balance plans and is, together with an August 2006 recent federal court ruling concerning IBM, expected to spur the growth of such plans. The ruling held that IBM’s cash balance plan did not discriminate against older workers.
PARTICIPANTS AND BENEFICIARIES RECEIVING
PENSION BENEFIT GUARANTY CORPORATION PAYMENTS, SINGLE-EMPLOYER PROGRAM, 1980-2005


(000)



Source: Pension Benefit Guaranty Corporation.

  • More than 80 percent of all claims against the PBGC have been recorded since 2000. Claims from the airlines and steel industries accounted for 75 percent of the claims received from 2000 to 2005.

  • In 2005 most people’s IRAs were held by mutual funds, followed by “other self-directed accounts,” generally brokerage accounts in which the investor has considerable control over the direction of investments.

IRA MARKET SHARES BY HOLDER, 2001-2005

($ billions, end of year)







Commercial banking$160.1$165.6$166.0$168.0$170.5
Saving institutions54.653.855.153.753.8
Credit unions39.943.346.847.749.3
Life insurance companies251.0308.3338.4376.0407.0
Money market mutual funds172.0190.0171.0153.0162.0
Mutual funds961.3822.01,095.01,279.01,432.0
Other self-directed accounts980.1950.01,118.61,258.71,392.4
Total2,619.02,533.02,991.03,336.03,667.0

Source: Board of Governors of the Federal Reserve System.

  • An increasing number of retirement plans give participants the option of opening up an account with a brokerage firm of their choosing through the plan. These “self directed accounts” can afford access to a wide variety of investment options.

IRA MARKET SHARES BY HOLDER, 2001 AND 2005



Source: Board of Governors of the Federal Reserve System.

(401)K ROLLOVER RATES

Workers who leave their jobs can preserve their 401(k) assets by rolling over the funds into a qualified individual retirement account (IRA) or by keeping them in the 401(k) plan. A survey by Hewitt Associates found that in 2004, 55 percent of workers either maintained their balances in the original plan or rolled the funds over into an IRA; 45 percent took a cash distribution upon termination of employment.
401(K) PARTICIPANT CHOICES AT TERMINATION BY AGE, 2004

(Percent)





20 to 29 years old19.5%14.7%65.8%
30 to 39 years old29.621.848.6
40 to 49 years old33.324.542.2
50 to 59 years old39.529.830.7
60 to 65 years old39.232.228.6
65 years old and over44.226.529.4
Source: Hewitt Associates LLC.
ASSETS IN 401(K) PLANS, 1996-2005

($ billions)





1996$351$710$1,061
19974807841,264
19986199221,541
19998139771,790
20008199061,725
20017988841,682
20027128681,580 (1)
20039271,050 (2)1,978 (2)
20041,096 1,171 (2)2,267 (2)
20051,2381,205 (2)2,443 (2)

(1) Preliminary data not finalized by the U.S. Department of Labor.
(2) Estimated by the Investment Company Institute.

Note: Components may not add to totals due to rounding.

Source: Investment Company Institute.

AVERAGE ASSET ALLOCATION FOR ALL 401(K) PLAN BALANCES, 2004



Note: Funds include mutual funds and other pooled investments.

Source: Investment Company Institute.