Defined Benefit Plan

More regulation

Can have pension income

If firm’s leverage is low, or if surplus is high, can take more risk in the pension fund.

If lower correlation to firm’s asset, can take higher risk.

If allow early retirement or active live to retired live ratio is low, cannot take high risk.

Constraints:

1. Liquidity –
1. Active/Retired
2. Amount of contribution
3. Plan Features
2. Time Horizon
1. Active/Retired ratio
2. On-going concern?
3. Legal Factors – ERISA preempts state and local pension laws

Should have the fund value in positive correlation with fund liability

Cash Balance Plan:

Employee’s account receives pay credit and interest credit periodically. Interest credit may be based on treasuries. This is not the real investment. The sponsor will invest in other assets to meet this “defined benefit plan”.

ESOP – Employee Stock Ownership Plan