cover cover next page > 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. cover next page > start_here.html[3/26/2014 9:51:09 PM] page_i < previous page page_i next page > Page i Fundamentals of Private Pensions < previous page page_i next page > page_i.html[3/26/2014 9:51:10 PM] cover cover next page > 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. cover next page > cover.html[3/26/2014 9:51:11 PM] page_ii < previous page page_ii next page > Page ii Pension Research Council Publications A complete listing of PRC publications appears at the back of this volume. < previous page page_ii next page > page_ii.html[3/26/2014 9:51:11 PM] page_iii < previous page page_iii next page > Page iii 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 < previous page page_iii next page > page_iii.html[3/26/2014 9:51:11 PM] page_iv < previous page page_iv next page > Page iv 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 < previous page page_iv next page > page_iv.html[3/26/2014 9:51:12 PM] page_v < previous page page_v next page > Page v 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 < previous page page_v next page > page_v.html[3/26/2014 9:51:12 PM] page_vi < previous page page_vi next page > Page vi 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 < previous page page_vi next page > page_vi.html[3/26/2014 9:51:13 PM] page_vii < previous page page_vii next page > Page vii 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 < previous page page_vii next page > page_vii.html[3/26/2014 9:51:13 PM] page_viii < previous page page_viii next page > Page viii 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 < previous page page_viii next page > page_viii.html[3/26/2014 9:51:14 PM]

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