How an Advanced Funded Pension Plan Works

Advance funded pension plans are, primarily, fully-funded contribution plans. Employers organize these plans in such a way so they can make future payments to beneficiaries without losing money. An essential feature of the advanced funded pension plan is that the employer periodically sets aside sufficient funds to guarantee the scheme's financial health. Unlike the unfunded pension scheme, such a plan is crucial since it protects both parties (the pensioner and the employer) against needless financial risks.

The advanced funded pension plan has a provision that designates the employees' benefits' precise nature. These provisions describe what an employee can expect to receive upon retirement. Employers can also make defined contributions. Generally, this means the employer can add to the existing plans, and employees who leave the company before retirement can still collect their pension plan.

Contributors may fund an advanced funded pension plan in several ways. For example, the employer can fund the entire pension plan or share this burden with employees. This is quite similar to the 401(k) or 403(b) retirement options. Alternatively, some employers may opt to fund the entire plan by taking a portion out of the employee's paycheck.

Real World Example of Advance Funded Pension Plan

For decades, the advance funded pension plan has worked remarkably well for the Chicago-based Ultimate Securities Corporation. For example, in 2015, the corporation offered its employees a robust pension plan that promised to give each retiree a lump sum of $10,000. To do this, the Human Resources department froze all plans to hire new employees until it determined that it had the funds to pay all 50 retirees $10,000 in cash by December 31, 2015.

In 2013-2014, HR released new data revealing that Ultimate Securities offered its employees a progressive pension plan featuring a 2% match during this period. Under this plan, the company only hired employees whose salaries would accumulate to $10,000 per year under specific conditions. For instance, before recruitment, HR always checked with the finance department to confirm the company could afford to set aside $10,200 to cater for the new workers' annual pension fund. In 2018, an internal survey involving all (500) Ultimate Security employees found that 98% of them described their employer's advance funded pension as "practical and superior" to the various unfunded pension alternatives.

Significance of an Advance Funded Pension Plan

The advance funded pension plan comes with significant benefits for both the employers and their employees. Employees benefit since they can receive their retirement benefits without delay. When a responsible employer fully funds this pension plan in advance, employees are guaranteed that there are sufficient assets to cover all their accrued benefits. Employers who use this plan can avoid incurring various financial costs and other risks that those using traditional pension plans deal with. The employer can also use available liquid assets to cover liabilities and pay the beneficiaries or pensioners in full.