What Are Allocated Benefits?
Allocated benefits are a type of payment that comes from a defined-benefit retirement plan. Allocated benefits are passed on, or allocated, to the plan participants once the insurance company has received its premiums.
This term can also refer to the maximum amount that can be paid for a given service that is itemized in a contract. A somewhat similar concept is the “benefit allocation method.” This method refers to the process of funding a pension plan by using one premium payment to claim one benefit unit for a designated time period.
- Allocated benefits are payments that originate from a defined-benefit retirement plan.
- Benefits are allocated to plan participants once the insurance company has received premium payments.
- The term also refers to the maximum amount that can be paid for a given service that is itemized in a contract.
- Retirement income to plan participants is backed by the insurance carrier and the Pension Benefit Guaranty Corporation (PBGC).
- The PBGC functions as a type of insurance in that it guarantees benefit payments regardless of if the plan becomes insolvent.
- Allocated benefits are regulated under the guidelines of the Employee Retirement Income Security Act of 1974 (ERISA).
Understanding Allocated Benefits
Allocated benefits provide guaranteed retirement income to plan participants that are ultimately backed by the insurance carrier and the Pension Benefit Guaranty Corporation (PBGC). The PBGC is a nonprofit organization that acts as an agency of the federal government.
The PBGC functions as a sort of insurance or warranty system in that it guarantees continued benefit payments for defined-benefit retirement plans in the private sector, so participants can still receive the payment to which they are entitled, even if the plan becomes insolvent or runs out of funds. The PBGC makes these payments by drawing upon funds accrued via insurance premiums submitted by employers who have qualifying retirement plans.
These payments are regulated under the guidelines of the Employee Retirement Income Security Act of 1974 (ERISA).
Allocated Benefits and ERISA
Allocated benefits provide the employees who participate in that plan with an added level of security and stability. Because the benefits that have been purchased are paid up, the employees can rest assured that they will receive those benefits even if their former employer goes bankrupt. This means retirement plan participants do not have to worry that they may be left without recourse should the plan experience some sort of unforeseen disaster.
ERISA is designed to protect the interests of millions of Americans who participate in retirement plans. It helps ensure that those participants are able to access the funds to which they are entitled once they are eligible to receive benefits from the plan.
While ERISA does not require a company to have a retirement plan, it does establish rules and policies for employers who do provide these plans. It requires employers or retirement plan managers to provide participants with certain basic information related to the plan, including the minimum time period required for eligibility to participate in the plan and the structure for how participants can earn benefits.
Defined Benefit vs. Defined Contribution
There are typically two types of retirement plans. Defined-benefit plans and defined-contribution plans. Allocated benefits would be a defined-benefit plan. Defined benefits do just that, they define a predetermined amount that will be paid out to the beneficiary upon retirement. Regardless of the fluctuations of the value of the investments, the beneficiary is to receive the defined amount upon retirement.
Defined-contribution plans consist of an employee making regular contributions to their retirement plan, which is a percentage of their salary. The employer also contributes to the plan. There is no defined amount of what the value of the payment will be upon retirement because the value of the investments will fluctuate and the beneficiary will receive whatever the amount is when they withdraw the funds. The most popular type of defined-contribution plan is a 401(k) plan.
Traditionally, companies primarily only had defined benefit plans, as they were the main source of payments during retirement. However, over time, defined contribution plans have become more popular and more common. This also means the risk has shifted from the employer to the employee because the employer is no longer accountable to pay out a defined amount.