F118. Private Pension Funds

Federal Reserve definition for F118 flow of funds table

The private pension funds sector encompasses all private pension plans that, in accordance with Title I of the Employee Retirement Security Act of 1974 (ERISA) have filed IRS / DOL / PBGC Form 5500 (or equivalent) with the Internal Revenue Service.

It also includes the Federal Employees Retirement System (FERS) Thrift Savings Plan, a supplementary retirement option available to federal employees since 1984.

The sector covers both defined benefit plans and defined contribution plans and includes both the retirement funds of nonprofit organizations and the single-employer and multi-employer plans of for-profit firms that are qualified for tax preferences.

It does not include annuities purchased for retirees or other 'insured assets' such as guaranteed investment contracts, separate accounts, or other retirement assets managed by insurance companies; the assets of private pension funds do include unallocated insurance company contracts, however.

IRAs and Keogh plans are not included in this sector.

Individual retirement accounts (IRAs) and Keogh accounts are not included in the private pension funds sector.

Rather, the assets of such accounts are included with the instruments in whose form the accounts are held, in the households and nonprofit organizations sector.

For example, the value of mutual fund shares held by the household sector includes the value of shares held in IRA and Keogh accounts, and the value of household sector deposits includes the value of deposits in IRA and Keogh accounts.

Defined Benefit Plans

Under a defined benefit pension plan, an employee typically receives an annuity upon reaching a specified age.

The size of the annuity in most cases is based on length of service and employment earnings; the annuity may or may not incorporate adjustments for changes in the measured cost of living, and it may be integrated with social security.

The employer makes regular contributions to the plan to fund the participant's future benefits.

Private defined benefit plans are frequently non-contributory, that is, participants do not contribute to the plan, and generally there are not individual accounts for participants.

The risk of the investment strategy is borne by the employer. Defined benefits plans invest in a variety of tangible and financial assets, but they may not invest more than 10 percent of the fund's assets in the firm (employer) securities.

Under a defined contribution plan, the employer or the employee, or both, contribute to the employee account.

The employee bears the investment risk, and the value to the employee at retirement depends on the accumulated contributions, investment earnings, and asset appreciation.

Defined Contribution Plans

There are many types of defined contribution plans, including savings, or thrift plans; profit-sharing plans; money purchase plans; and employee stock ownership plans (ESOPs).

A 401(k) arrangement, one form of defined contribution plan, allows an employee to have a portion of his or her compensation (otherwise payable in cash) contributed to the plan and to defer federal tax on that contribution until the time of withdrawal.

In 1994, there were over 690,000 private pension plans in the U.S.

In contrast to defined benefit plans, the composition of defined contribution plans is generally dictated by the investment choices of plan participants, and the portfolio is not subject to distribution requirements.

As of the end of fiscal year 1994, the private pension funds sector comprised 74,400 defined benefit plans and 615,900 defined contribution plans. At the end of 1997, the sector held $3.6 trillion in assets, with that amount about equally split between defined benefit plans and defined contribution plans.

Corporate equities and mutual fund shares account for more than half of the sector's total financial assets; other assets are government, agency, and corporate bonds.

Data for the defined benefit and defined contribution plans are published separately in the Federal Reserve Board's quarterly Z.1 statistical release.

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