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.” That method refers to a process of funding a pension plan by using one premium payment to claim one benefit unit for a designated time period.
BREAKING DOWN Allocated Benefits
Allocated benefits provide guaranteed retirement income to plan participants that is ultimately backed by the insurance carrier and the Pension Benefit Guaranty Corporation, or PBGC. The PBGC is a nonprofit organization that acts as an agency of the federal government. It acts 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, or ERISA.
Allocated Benefits and the 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.
The 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 when the times comes that 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.