WHAT IS 'Advance Funded Pension Plan'

An advance funded pension plan is funded concurrently with the benefits accrued by employees. These funds are set aside and accounted for well before employees retire. Advance funded pension plans are generally defined contribution plans and are fully funded.

There are several ways these plans can be funded. In one scenario, the employer alone bears the burden of funding the plan. In another, the plan can be funded by both the employer and the employee, similar to a 401(k) or 403(b) retirement option.

BREAKING DOWN 'Advance Funded Pension Plan'

An advance funded pension plan has sufficient liquid assets to cover all of its liabilities, including all future payments to beneficiaries. This type of pension plan not only benefits employees who expect to receive the full allotment of their retirement benefits, but also helps companies eliminate many of the costs and risks that accompany more traditional pension plans. 

This type of pension plan designates exactly what the benefits will be upon retirement and employers make defined contributions along the way. This means that companies can effectively add to the plan as they go, meaning that employees who depart the company before meeting the predetermined amount of time for them to retire can still reap some of the benefits of the pension plan.

The Unfunded Pension Plan

When employers offer a pension plan, they can plan for the anticipated financial requirements of the pension plan, set aside a certain amount of money on a regular basis and invest the money to, ideally, grow the fund. Conversely, certain employers elect to fund the pension plan out of current earnings. In contrast, the unfunded pension plan is an employer-managed retirement plan that uses the employer's current income to fund pension payments as they become necessary. This type of plan uses actuarial assumptions to determine the periodic contributions it makes to the plan. 

An unfunded pension plan carries much more financial risk, as well as operational risk, for the pensioner and the employer than the advance funded pension plan. Both may be subject to investment risks should the company go through a difficult period financially. In certain situations, either due to operational issues on the company's part or because of broader market dynamics, the pensioner may not have the ability to sustain the appropriate contribution rate to ensure that the pension liabilities are met.

  1. Pensionable Service

    Pensionable Service refers to the amount of time a worker accrues ...
  2. Pension Plan Administrator

    A pension plan administrator manages the day-to-day affairs and ...
  3. Allocated Funding Instrument

    Allocated funding instrument is a type of insurance or annuity ...
  4. Pension Adjustment Reversal - PAR

    Pension Adjustment Reversal - PAR is an option to adjust retirement ...
  5. Current Service Benefit

    A current service benefit is the pension benefit earned by an ...
  6. Pension Shortfall

    A pension shortfall occurs when a company with a defined benefit ...
Related Articles
  1. Retirement

    America's Frozen Pension Dilemma

    Unfortunately, there are several factors that have eroded the presence of pension plans in America, and workers need to be prepared to replace that expected income for their retirement years. ...
  2. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  3. Managing Wealth

    Difference Between Pensions and Social Security

    Both pensions and Social Security provide an income stream to retirees, but they differ widely on how they're structured and funded. Learn the differences.
  4. Retirement

    What to Do If Your Pension Is Frozen or Terminated

    Here's what needs to be considered if your employer freezes or terminates your pension.
  5. Retirement

    A Primer On Defined-Benefit Pension Plans

    Most of us will rely on a pension plan in the future, so it's best to know the details of the various plans before signing up.
  6. Retirement

    Florida's Surprisingly Flexible State Retirement System

    Retired Florida employees can choose a 401(k)-style investment plan or a traditional pension.
  7. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  8. Financial Advisor

    How Do Pension Funds Work?

    Traditional private pension funds are well regulated by the government through ERISA and the PBGC. Alternative investments are aiding portfolio returns.
  9. Retirement

    5 Big Companies That Have Cut Out Pension Plans

    Companies are putting the responsibility of saving for retirement on the employee.
  10. Retirement

    Can Your Pension’s Cost-of-Living Clause Be Frozen?

    Recent events in New Jersey prove that relying on a pension alone to fund your retirement is risky. Make sure you have multiple retirement income sources.
Trading Center