The immediate participation guarantee contract (IPG) is similar to the deposit administration contract in that the employer’s contributions are placed in an unallocated fund and the life insurance company guarantees that the annuities for retired employees will be paid in full. They differ from deposit administration contracts in the extent to which and the time at which the insurance company assumes mortality, investment, and expense risks with respect to retired lives. The IPG contract may be said to have two stages. The first or active stage continues for as long as the employer makes sufficient contributions to keep the amount in the fund above the amount required to meet the life insurance company’s price to provide guaranteed annuities for employees who have retired.
What are Guaranteed Investment Contracts?
Under guaranteed investment contracts (GICs), the insurance company accepts a specific amount of money, usually $100,000 or more, and agrees to return the money at a fixed date (1 to 15 years) in the future. Interest is guaranteed for the life of the contract, usually at rates that are competitive with other long-term, fixed-income investments. The interest may be paid at fixed intervals or held to compound until the termination date of the contract. Because the fixed term of the contract is one of its key features, substantial penalties usually are imposed for premature withdrawal (if it is allowed at all). Expenses of the insurance company often are expressed as a small subtraction from the gross interest rate quoted in arriving at the contract guaranteed rate.
What are 401(k) and Thrift Saving Plans?
A 401(k) plan is an employee savings plan that allows for employee contributions on a pretax basis and for partial employer matching of employee contributions. However, a 401(k) plan provides current as well as future tax savings for employees. Under a 401(k) plan, employees agree to defer a percentage of pretax income. The money arising from this decision reduces current (taxable) salary and is placed directly in the 401(k) plan by the employer. The 401(k) contribution is considered to have been made by the employer and is, therefore, generally not treated as part of an employee’s taxable income for federal income tax purposes.
What are Profit sharing Retirement Plans?
Profit-sharing plans are a type of defined contribution plan in which employer contributions are typically based in some manner on the employer’s profits. Annually, each employee is allocated a share of the profits contributed to the profit-sharing plan. Although relatively rare, money made available each year may be used as single premiums to purchase whatever amounts of annuity can be provided on the basis of a price structure guaranteed by an insurance company. Profit-sharing plans were originally introduced to share profits with employees with the goal of improving productivity. They were adapted to provide retirement benefits in order to avoid the cash flow problems that a qualified defined benefit pension plan creates by virtue of mandatory annual contributions. The employer retains a certain amount of control over the level of annual contributions made to the plan and the allocation formula used.
Retirement Plans in Selected Countries
| Country |
Benefits Provided |
| Brazil | There are some private defined benefit plans, but defined contribution plans are growing in popularity. Severance plans resemble a defined contribution retirement plan with an 8 percent annual employer contribution. |
| Germany | Employers are permitted to establish tax-deductible book reserves without establishing a separate trust for pension schemes. Separate trusts and insured schemes are also common. |
| Japan | Lump-sum severance plans are universal, using tax-deductible book reserves as the funding mechanism. Separate pension trusts are allow able only for employers with more than 100 employees. Insured pension schemes are available for smaller employers. Pension trusts are subject to an annual tax of approximately 1.2 percent on the assets. No vesting is required. Employers with more than 5,000 employees may contract out of government-provided pensions. |
| Norway | Pension schemes are common only in medium-size and large companies nearly all plans consist of insurance contracts rather than separate trusts. |
| South Korea | Employer-provided defined benefit pension schemes do not exist. Lump-sum severance plans with low benefit levels are nearly universal Individual defined contribution plans with employer contributions are becoming popular. |
| Thailand | Employer-sponsored pension plans are not mandatory but, where provided, the employees must contribute at least 3 percent of salary. Employers contribute at least as much as the employees and may contribute up to a tax-deductible limit of 15 percent. Invested assets are not in an irrevocable trust, thereby allowing the employer to capture some of the investment income as income to the company. This is equivalent to the book reserve method in other countries. |
| United Kingdom | A wide range of defined contribution and defined benefit plans is available. If the benefits provided are substantial, the employer can contract out of the government-provided pension benefits. Lump-sum payments at retirement are common, resulting in many arrangements that mimic the severance plans found in other countries. The United Kingdom is one of only a few countries that do not require mini mu recognition of accrued liabilities through separate funding or book reserves. |
| United States | With less than one-half of the work force covered, employer-provided retirement plans are not as common as in most other countries where there is nearly universal coverage of employees. A wide variety of de fine benefit and defined contribution plans using tax-exempt trusts or insurance contracts is used. Non-tax-deductible book reserves, with no separate funding, are common for benefits provided to executives. Mandatory employee contributions are allowable but are not common. When employee contributions are mandatory or otherwise allowed, their tax status is dependent on the particular type of plan established by the employer. |
| Zimbabwe | Employees contribute 5.0 to 7.5 percent of salary into employer- sponsored defined benefit plans. Employers typically contribute an additional 10 to 12 percent of employee salaries. Funds must be in a separate trust with one-half of the trustees representing employee interests. Some 55 percent of all trust fund assets must be invested in government securities.
Source: Bruce A. Palmer, “Employee Benefits,” in Harold D. Skipper |
