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.

RELATED TERMS
  1. Unfunded Pension Plan

    An unfunded pension plan is an employer-managed retirement plan ...
  2. Plan Participant

    A plan participant either contributes into a pension plan or ...
  3. Pensionable Service

    Pensionable Service refers to the amount of time a worker accrues ...
  4. Integrated Pension Plan

    An integrated pension plan uses a participant's Social Security ...
  5. Pension Plan Administrator

    A pension plan administrator manages the day-to-day affairs and ...
  6. Corporate Pension Plan

    A corporate pension plan is a formal arrangement between a company ...
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. Retirement

    How Safe Is Your Pension?

    A 2014 law permits some private pension plans to reduce benefits. How to figure out if your retirement income is endangered.
  4. Personal Finance

    Can Blockchain Solve the Global Retirement Crisis?

    Blockchain comes at a crucial time and may represent the savior of pension plans everywhere.
  5. 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.
  6. 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.
  7. Retirement

    Here’s How to Find a Lost Pension

    To find a lost pension, you have to figure out who is now responsible for paying it and how to claim your benefits.
  8. Retirement

    5 Big Companies That Have Cut Out Pension Plans

    Companies are putting the responsibility of saving for retirement on the employee.
  9. 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.
RELATED FAQS
  1. How do pay-as-you-go pension plans work?

    Learn what a pay-as-you-go pension plan is and how it is different from fully funded pension plans. Understand how public ... Read Answer >>
  2. What are the main differences between a provident fund and a pension fund?

    Learn about some of the primary differences between the benefits of provident funds and pension funds, two types of retirement ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center