In order to make sure that the pension fund will contain enough money at retirement to pay the employees their defined benefits, Congress passed a law in 1974 known as the Employee Retirement Income Security Act (ERISA).
This law requires companies to fund their pension plans in an orderly manner so that the employees are protected at retirement. The periodic amounts to be contributed to the fund are directly related to the future benefits expected to be paid. Most plans require contributions that will accumulate to the balance needed to pay the agreed-upon benefits at retirement. The contribution amounts are determined by actuaries and must be adjusted as estimates and assumptions are revised to reflect changing conditions.
In most cases, the employer contributes annually an amount equal to the present value of future benefits attributed to current services. If the employer contributes less than this amount, the plan is said to be underfunded; if the employer contributes more, the plan is overfunded.