SIC 6371 Pension, Health, and Welfare Funds
SIC 6371
Establishments primarily engaged in managing retirement, health, and welfare funds comprise what is commonly called the pension fund industry. Companies owning pension funds are called fund sponsors. Sponsors maintain funds for the purpose of meeting future obligations, such as benefit payments to retired employees. Some sponsors manage their own funds, or reserves, while others hire fund managers or consultants to conduct their investment activities.
523920
Portfolio Management
524292
Third Party Administration for Insurance and Pension Funds
525110
Pension Funds
525120
Health and Welfare Funds
Total retirement plan assets in the United States amounted to $11.44 trillion in 2003. By the mid-2000s the oldest baby boomers were preparing to enter their retirement years, and the future of corporate pension programs was in serious jeopardy. Pension planning changed significantly between the mid-1990s and the mid-2000s as corporate-funded direct benefit plans declined in numbers and direct contribution plans increased in popularity.
As America continued to age, the issue of pension funding was expected to remain of national interest. In 2000, 12.4 percent of Americans were 65 and older, but by 2030 nearly 20 percent will be 65 and older. In 2008 the oldest baby boomers will reach retirement age, and ten years later Social Security expenditures are expected to outpace payroll tax receipts. In addition, rising health care costs and extended life spans will add to the industry's importance.
Pension funds are essentially vehicles by which workers can save income generated during their careers to help them maintain a reasonable living standard when they retire. More than 80 percent of employers offer some type of savings plan that will provide pension or retirement benefits to at least some of their employees. In addition, workers can invest in pension vehicles such as life insurance or various tax-deferred annuities that act as funds.
Pension funds operate under the assumption that money, which the employer or employee places into the fund, will earn interest income at a rate greater than inflation. The more interest and savings that accrue over a period of time, the more money will be available to provide benefits for the employee at retirement. Pension funds are generally favored over most other long-term savings plans because they benefit from a favorable tax status. These tax laws allow employees to defer taxes on both their savings and the interest income that those savings produce.
Federal, state, county, and municipal governments all provide pension plans for their employees. Publicly owned corporations, such as the Tennessee Valley Authority, also fall into this category. In addition, the federally funded Old Age Survivors' Insurance (OASI) fund is included in this group. In the mid-2000s state and federal public funds constituted approximately 26 percent of all pension assets. OASI has the largest membership of all government pension funds. This national program of social insurance is designed to cover all persons employed in the United States with the exception of clergy, some state employees, and most federal workers. Unlike national insurance programs in other countries, OASI entitlements are not based on need but on previous individual contributions. At the end of 2004 more than 159 million Americans were covered under OASI and about 92 percent of all Americans over the age of 65 were receiving benefits.
Most federal employees who are not covered by OASI are included in the Civil Service Retirement System (CSRS) or Federal Employees Retirement System pension funds, which provide retirement, survivor, and disability benefits to career employees of the federal government. Participation in these plans is compulsory.
In 2003 federal government pension plans held total assets of $959 billion, up from $799.2 billion in 2000 and $340.4 billion in 19990. State and local governments held assets in pension programs valued at $1.97 trillion in 2003, down from $2.12 trillion in 2000, but up from $800.6 billion in 1990.
Private plans that employ fund managers exist in both the nonprofit and commercial sectors. Organizations in the nonprofit sector include churches and service associations, while commercial entities include for-profit establishments. Pension funds in the private sector, as well as some funds in the public sector, can be classified as either "defined benefit" or "defined contribution" plans. Defined benefit plans, once the most popular type, promise annuities beginning at retirement that are usually based on the worker's years of service and average wage during the last few years of employment. With a defined contribution plan, firms effectively contribute to an employee's savings account. The accumulated tax-preferred savings belong to the worker, who usually receives a lump sum at retirement. The most popular defined contribution plan in the mid-2000s was the 401(k).
In 2003 defined benefit plan assets totaled $1.72 trillion, and defined contribution assets totaled $2.25 trillion, of which $1.9 trillion was held in 401(k) plans. Privately insured plans held assets of $1.57 trillion. Assets in Keough plans and Individual Retirement Accounts (IRAs), which are individual pension accounted sponsored by insurance companies, totaled $2.98 trillion. Social Security assets added another $1.36 trillion to the national pension savings.
To receive tax-preferred status for their private pension funds, managers must comply with Internal Revenue Service (IRS) regulations and guidelines. The Federal Employee Retirement Security Act (ERISA) of 1974 is the principal legislative tool used to govern pension funds. It imposes minimum funding requirements, primary fiduciary responsibilities, and disclosure criteria. For instance, a fund manager must show that its reserves cannot be diverted prior to the satisfaction of all liabilities and that it will not discriminate in favor of its more highly paid employees. Details about the fund must also be made known to employees or members.
An important element of the private pension fund market is the Pension Benefit Guaranty Corporation (PBGC), a government agency that pays retirement benefits up to a set maximum amount to retirees when a company defaults on its retirement benefit obligations to its members or their dependents. In the mid-2000s the PBGC made payments to over 515,000 retirees and held liability for over one million present and future retirement benefit plans. PBGC made headlines in 2005 after bailing out United Airlines who defaulted on its pension program.
Pension fund management entails two basic activities: serving members or employees covered by the plan and directing investment and management of asset reserves. The fundamental provisions of any pension plan sets forth rules of eligibility, conditions for the receipt of pensions, a pension benefit formula, and a source of contributions. Companies that sponsor funds usually place control of the funds with a corporate trustee. Trustees, or custodians, oversee the funds to ensure that they comply with federal regulations. Trustees also supervise investment decisions made by fund managers.
While many fund sponsors hire outside consulting and investment firms to assist with investment of their pension reserves, most also have fund managers in-house, or within their organization. The fund manager may, in turn, hire several other managers or consultants who specialize in various investment activities. Administration activities, such as handling fund members' needs and delivering payment services, are often handled separately by the fund sponsor.
A pension fund manager is charged with three basic duties: developing a financial profile of the fund, developing investment policies, and formalizing an investment program. The financial profile essentially describes the plan's funding structure. The funding structure consists of existing assets such as cash and investments, obligations for currently retired employees, obligations for future retirees, and expected future contributions by both employees and the fund sponsor. The plan's funding structure is influenced by several factors, including the growth stage of the company, estimates for future employee and profit growth, expected future investment returns, and future tax rates.
When developing investment policies, managers must adopt return objectives, risk constraints, and asset diversification requirements. These components, when properly synthesized, serve to minimize the risk of investment losses and ensure that the minimum return necessary to meet future obligations is realized.
Finally, the formalization of the investment program requires selection of an investment committee to review strategy; definition of an asset allocation plan; creation of a detailed investment portfolio strategy; and the determination of an effective means of monitoring, evaluating, and reporting investment results. For example, the manager must determine the...
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