Fundamentals of private pensions

884 Pages·3.9 MB·English

by  Dan M. McGill ... [et al.].

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title: Fundamentals of Private Pensions
author: McGill, Dan Mays.
publisher: University of Pennsylvania Press
isbn10 | asin: 0812233808
print isbn13: 9780812233803
ebook isbn13: 9780585218694
language: English
subject Old age pensions--United States.
publication date: 1996
lcc: HD7105.35.U6M34 1996eb
ddc: 658.3/253/0973
subject: Old age pensions--United States.
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Fundamentals of Private Pensions

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title: Fundamentals of Private Pensions
author: McGill, Dan Mays.
publisher: University of Pennsylvania Press
isbn10 | asin: 0812233808
print isbn13: 9780812233803
ebook isbn13: 9780585218694
language: English
subject Old age pensions--United States.
publication date: 1996
lcc: HD7105.35.U6M34 1996eb
ddc: 658.3/253/0973
subject: Old age pensions--United States.
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Pension Research Council Publications
A complete listing of PRC publications appears at the back of this volume.

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Fundamentals of Private Pensions
SEVENTH EDITION
Dan M. McGill
Kyle N. Brown
John J. Haley
Sylvester J. Schieber
Pension Research Council
The Wharton School of the University of Pennsylvania
University of Pennsylvania Press
Philadelphia

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Copyright © 1996 by the Pension Research Council of the Wharton School of the University of Pennsylvania
All rights reserved
Printed in the United States of America
Library of Congress Cataloging-in-Publication Data
Fundamentals of private pensions/Dan M. McGill . . . [et al.] 7th ed.
p. cm.
Rev. ed. of: Fundamentals of private pensions/Dan M. McGill, Donald S. Grubbs, Jr. 1989
Includes bibliographical references and index.
ISBN 0-8122-3380-8 (cloth: alk. paper)
1. Old age pensions United States. I. McGill, Dan Mays. II. McGill, Dan Mays. Fundamentals of private pensions.
III. Wharton School. Pension Research Council.
HD7105.35.U6M34 1996
658.3'253'0973 dc20 96-15518
CIP

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CONTENTS
Preface vii
1. Underlying Forces 1
Section I. The Regulatory Environment
2. Historical Review of Pension Regulation 31
3. Basic Regulatory Environment 44
4. Coverage and Participation 61
5. Nondiscrimination Requirements 75
6. Determination of Benefits 100
7. Tax Treatment 115
8. The Economics of Tax Preferences for Retirement Plans in the United States 136
9. Organizational Structure and Flexibility 160
Section II. The Structure of Private Retirement Plans
10. Defined Benefit Plan Design: Retirement Benefits 201
11. Defined Benefit Plan Design: Ancillary Benefits 225
12. Defined Contribution Plan Design Features 247
13. Hybrid Plans 297
14. Individual Retirement Plans, Simplified Employee Pensions, Tax-Sheltered
Annuities, and Keogh Plans 306
15. Integration of Pension Plans with Social Security 322
Section III. The Economics of Pensions
16. Overall Objectives in Designing a Retirement Program 337
17. Financing of Employer-Sponsored Retirement Plans 359

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18. Total Retirement Income: Setting Goals and Meeting Them 372
19. Delivery of Retirement Benefits 414
20. Human Resource Incentives in Employer-Sponsored Retirement Plans 441
21. Adjustment of Retirement Benefits for Inflation and Productivity Gains 478
Section IV. Pension Funding and Accounting
22. Actuarial Cost Factors 499
23. Benefit Allocation Actuarial Cost Methods 519
24. Cost Allocation Actuarial Cost Methods 543
25. Pension Cost Illustrations and Forecasts 564
26. Valuation of Ancillary Benefits, Employee Contributions, and Small Plans 577
27. Approaches to Meeting the Financial Obligations of a Defined Benefit Plan 589
28. Pension Accounting 620
Section V. Assets and Insurance
29. Management of Pension Plan Assets: Policy 645
30. Management of Pension Plan Assets: Operations 670
31. Allocated Funding Instruments 703
32. Unallocated Funding Instruments 722
33. Single-Employer Plan Termination and Plan Benefits Insurance 740
34. Multiemployer Plan Withdrawals and Plan Benefits Insurance 770
Appendix A: Basic Actuarial Functions and Values for Derivation of Pension Plan
Costs and Liabilities 787
Appendix B: List of Case Citations 793
Appendix C: List of Statutes, Rules, and Regulations 795
Index 809

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PREFACE
The first edition of this book appeared more than 40 years ago in 1955. It reflected the state of the pension art at
that time or, at least, the author's perception of the prevailing state. The book contained 209 pages of text
compressed into five long chapters. During the intervening years, the private pension institution has expanded
enormously in scope, diversity, and complexity. The successive editions of this book have mirrored the changes in
the field, especially the increasing diversity and complexity. This edition bears little resemblance to the original.
At the time of its publication, the original edition was thought to be a comprehensive and authoritative exposition
of existing theory and practice in the design and operation of employer-sponsored retirement programs. It won the
coveted Elizur Wright Award of the American Risk and Insurance Association as the outstanding original
contribution to pension literature in the year of its publication. Yet by today's standards, the book would be
considered relatively elementary and naive, particularly the portions dealing with the actuarial and financial aspects
of pensions.
Each revision has been a major undertaking, reflecting interim developments and a refinement of concepts and
terminology. The second edition, published 10 years after the first, was necessitated by the evolution of pension
practices. As the preface to that edition stated: "Plan provisions have been refined, new types of funding
instruments have been developed, investment policies have been expanded, new tax rulings have been issued, and
more meaningful terminology has evolved."
A third edition, published in 1975, was necessitated by the enactment of the Employee Retirement Income Security
Act (ERISA), even though it would have been justified by other forces and events. The third edition was more than
a revision; it represented a recasting and rewriting of most of the materials in the second edition. More emphasis
was placed on the rationale for various practices in plan design and financing, including the advantages and
disadvantages of the various approaches. The requirements and standards of ERISA were dealt with as appropriate
throughout the book. The presentation in this edition was based on the legislative language and history of ERISA
since no regulations or interpretive rulings had been issued before the book went to press.
The major thrust of the fourth edition, brought out only four years after its predecessor, was to update the book in
the light of the manifold regulations, rulings, and interpretations issued by the Internal Revenue Service,
Department of

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Labor, and Pension Benefit Guaranty Corporation in explanation of ERISA. The section of the third edition
dealing with actuarial considerations was completely rewritten and expanded, with new terminology and a new
framework for the analysis of actuarial cost methods. New chapters on profit-sharing plans, thrift plans, and the
federal tax treatment of qualified asset accumulation plans were added. Finally, new developments, such as
guaranteed income contracts of life insurers, were recognized, and refinements of various sorts were introduced.
In recognition of the mushrooming volume of pension plan assets and the responsibilities associated with their
investment, the fifth edition, published in 1984, added chapters on investment policy and operations. This edition
also included a discussion on accounting for pension plan costs and liabilities, a subject of growing importance and
controversy. Individual account plans of various sorts were given expanded treatment, and this necessitated the
addition of a new chapter on individual retirement accounts and voluntary employee contributions. The material on
plan benefits insurance was completely rewritten to incorporate the changes introduced by the Multiemployer
Pension Plan Amendment Act. A section on stochastic modeling was added to the chapter on forecasting plan
costs, liabilities, and cash flow. The material was again updated to reflect changes in applicable law and business
practices.
Like the previous revisions, the sixth edition, published in 1989, contained much new material. Repeated rounds of
federal legislation during the 1980s had touched almost every aspect of pensions, and the text had to be
substantially changed throughout. Court decisions, together with new regulations and guidelines from the
regulatory agencies, also necessitated extensive changes. The chapter on accounting was completely rewritten to
reflect Statements of Financial Accounting Standards No. 87 and No. 88 of the Financial Accounting Standards
Board. Further revision had to be made because of changes in the types of contracts used by insurance companies
and changes in other areas.
This seventh edition is once again necessitated by the evolution of the pension environment. Since 1989, we have
seen the continuing development of new legislative and regulatory initiatives that have affected retirement
programs. These include the Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget
Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1990, the Older Workers Benefit Protection
Act of 1990, the Unemployment Compensation Amendments of 1992, the Omnibus Budget Reconciliation Act of
1993, the Family and Medical Leave Act of 1993, the Uruguay Round of the General Agreement on Tariffs and
Trade, and the Uniformed Services Employment and Reemployment Rights Act of 1994. We have also seen new
changes in the structure and design of plans as employers attempt to deal with the needs of workers and the cost of
operating their benefit programs. This edition represents a major restructuring of the materials included in the
earlier editions. For example, the discussion on the structure of defined benefit and defined contribution plans has
been reorganized in a way that should facilitate the understanding of those plans. This edition also includes a great
deal of new material. Over the last 10 to 15 years, a substantial economics literature on the operations of employer-
sponsored retirement programs has evolved. Chapters have been added that address the economics of the tax
incentives provided to retirement programs and

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