Under ERISA, companies must make periodic contributions to the pension fund, which is usually admin
istered by an independent trustee. The trustee then invests these monies in stocks or interest-bearing securities.
istered by an independent trustee. The trustee then invests these monies in stocks or interest-bearing securities.
Thus the fund will increase through the earning of dividends and interest, or as a result of increases in the market value of these securities. Conversely, the fund will decrease if the market value of the securities falls. The relationship between the beginning fair value of the pension fund and its ending fair value may be expressed as follows:
Pension fund value, beginning of year
+ Employer contributions
+ Actual return on fund assets
− Benefits paid
= Pension fund value, year-end
EXAMPLE
Company B had a beginning-of-year pension fund value of $200,000, and an end-of-year value of $300,000. This year its contributions to the fund were $150,000, while the fund paid benefits of $25,000. The actual return must have been a negative $25,000, calculated as follows:.
Company B had a beginning-of-year pension fund value of $200,000, and an end-of-year value of $300,000. This year its contributions to the fund were $150,000, while the fund paid benefits of $25,000. The actual return must have been a negative $25,000, calculated as follows:.
$200,000 + $150,000 + X − $25,000 = $300,000
X =−$25,000