There are two ways that a pension plan can terminate. We'll call it the good way and the bad way.
In the good way, the pension plan is fully funded and the employer simply closes it. In doing so, the employer either purchases an annuity that will pay out the full benefits on an annual basis, or issue a lump sum payment to each pensioner for the appropriate amount.
In the bad way, a pension fund lacks the money to pay benefits in full. (The technical name for this is "distress termination.") In this case, the employer has to convince authorities - either a bankruptcy court or a government entity called the Pension Benefit Guaranty Corporation, or PBGT - that there is enough financial distress to justify abruptly closing the underfunded pension. If convinced things are bad enough, the PBGT will take over the plan and doll out benefits as best it can.
Whether the pension plan goes out the good way or the bad way, the process of divvying out benefits is called the "allocation of plan assets on termination." There are various ways this can take place, depending on the specific situation.
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Finance: What is a 401(k)?51 Views
Finance a la shmoop... what is a 401k plan? okay say it with me tax deferred savings
that's it it's really not all that complex for the fancy numbers there all [Complex formula scribbles]
right well when you make money at work you get to defer the tax that you'll pay
on your income or earnings to be paid much later in life and you get to invest
that dough and let it ride tax-free until you take it out of your 401k plan [Money coming out of deferred savings piggy bank]
brokerage account and then at that point well you'll pay ordinary income tax on
your gains well the 401k was a part of the tax code
that was put into motion in the 1980s as the government began to painfully
realize that Social Security wasn't all that secure and that a whole generation
of people who had paid money into Social Security wouldn't get anything back so [People protesting outside the white house]
the government opened the door and made it easy or at least easier for the semi
wealthier masses to save money for their retirement and this was a new idea at
the time a whole new concept like a flying car before then it was mama [Man talking and flying car goes by a window]
corporation who managed the pension money for her employees you know that
sucking off the corporate teat and all that stuff well it fostered a sense of
long-term lifetime loyalty to the company and was all just very you know
IBM like a born in pinstriped blue diapers IBM employee with a hard loyal [Baby boy playing with a flashing rattle]
workforce working away there toiling in the IBM salt mines for 35 years
then retiring at 60 and having smoked a lot dying at age 65 and then that was
all she wrote well that was then this is now it's a different era different
financial pressures so companies don't generally offer pensions today and they
don't generally manage them themselves because the cost of buying real talent
like people who consistently beat the stock market in good times and
bad managing that 401k money is astronomically expensive and generally [Boxing gloves punching the stock market]
speaking corporations can't afford to pay those people nine times whatever
the CEO makes so companies generally contribute some amount of money to a
401k and then they leave it up to the employees to figure out how they want to
invest their retirement savings on their own and that's a good thing most of the
time and you know hopefully it's there when they want to go take it out and
they need the money when they're old and decrepit like like I'm getting...
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