What Is an Accrued Monthly Benefit?
An accrued monthly benefit is the dollar amount that an employee can expect to receive as a pension benefit after retiring. The accrued monthly benefit is based primarily on the employee's years of service and salary history.
- Companies that offer pensions generally have a vesting period before an employee is eligible.
- Once eligibility starts, the employee will have an estimated accrued monthly benefit, based on their current salary and length of service.
- As the years pass, the accrued monthly benefit rises until the final amount is calculated based on the employee's retirement date.
Understanding the Accrued Monthly Benefit
Pensions have become increasingly rare among private-sector employees in the U.S. In recent years, companies have steadily abandoned pension plans in favor of tax-advantaged retirement savings plans such as 401(k) plans.
A defined-benefit plan or pension plan is an employer-sponsored retirement plan in which the employer pays benefits to an employee during their retirement. The amount of money paid to the employee is based on several factors, including the employee's length of employment and salary history. A defined-contribution plan, such as a 401k, is a retirement savings plan in which employees deposit or contribute a percentage of their salary into the account to fund their retirement.
A defined-contribution plan is also an employer-sponsored plan and sometimes, but not always, the employer may match a portion of an employee's contributions up to a certain amount per year or a percentage of the employee's salary.
When comparing the differences between a pension plan and a 401k, we can see why many employers have opted to move away from offering their employees pension plans in favor of retirement savings plans. A 401k is less costly to the employer since the employee is responsible for saving for their retirement and the employer match isn't necessarily guaranteed. As a result, more and more companies have moved away from pension plans.
Union vs. Nonunion Employees
In 2020, the latest data available, only 11% of American workers who were not in a union had access to a defined benefit, or pension plan, while 91% of union workers had access to a pension plan. On the other hand, 65% of nonunion workers in the U.S. had access to a defined-contribution plan, such as a 401k, while 34% of union workers had access to a defined contribution plan.
Pension Plan Requirements
Many pension plan recipients are employees of state or local governments, where pensions are still common. Some modern pension plans come with both an employer contribution and an employee contribution.
Companies and governments that offer pension plans usually make them available only to employees who have put in a set number of years of service. The purpose of this vesting schedule is to incentivize the employee to perform well and remain with the company. Once that vesting period is achieved, the accrued monthly benefit that will be due after retirement can be estimated based on a projection of the employee's number of years to retirement and expected salary to that date.
Companies that offer retirement pensions provide estimates of the amount that each employee can expect to receive, based on several prospective retirement dates. This is important information, as the employee may well set a firm date for retirement based on these figures.
Accrued Monthly Benefit and Pension Benefit Obligation
Companies that offer pensions must record the amount they are obligated to pay out on their balance sheets. The company's pension benefit obligation (PBO) is the current estimated amount that it owes to its employees.
The percentage of American workers who are eligible for a pension after they retire.
This is an actuarial liability equal to the present value of liabilities earned and the present value of liability from future compensation increases. It measures the amount of money a company must pay into a defined-benefit pension plan to satisfy all of the pension entitlements that employees have earned to date, adjusted for their expected future salary increases.
A PBO can be an enormous liability for a company that has not set aside enough funds or managed its investments well enough to cover the payments it owes to its retirees.
The Asset Manager's Role
Many companies contract for the services of an asset manager. These managers invest the employees' contributions for a range of objectives, such as capital preservation or modest growth via appropriate investment strategies that they have been built out or acquired over time. Managers that advise pension funds generally adopt lower-risk strategies to avoid losing the employees’ wealth.
It’s important to note a pension’s funded status, as well. This describes how much of a pension plan is funded for employee benefit purposes. For example, the enormous CalPERS (California Public Employees’ Retirement System) fund reported a preliminary 21.3% net return for the fiscal 2020-2021 year that ended June 30, 2021. CalPERS assets at the end of the fiscal year stood at more than $469 billion. Based on these preliminary fiscal year returns, the funded status of the overall PERF is an estimated 82%.