Employee pension plans are one of the most important fringe benefits and operating expense, as well as costly and complex. There are many different types of pension plans. If the employee contributes to his/her pension plan, it is called contributory; if he/she does not, it is called noncontributory. In a defined contribution pension plan, the amount contributed by the employer is determined when the pension expense is calcutate based on current employee's salary, employee's age and years of employment; the employer has no further liability. Pension plans that are fully funded, are usually managed by banks or pensions funds. In a defined benefit pension plan, the pension expense is estimate based not just on current salary but also expected employee years of service, life expectancy, employee turnover, as well as expected investment fund future income. Actuaries are used to calculate such benefits. The employer must incur an additional contribution liability in a defined benefit pension plan if the amount in the fund is insufficient to make the promised retirement payments; the unfunded pension liability can be quite large. Conversely, in a defined contribution pension plan, the employee bears the investment risk in the pension fund. In the United States, pension plans must comply with the requirements of the Employment Retirement Income Security Act (or ERISA), and employer must make disclosures in the Annual Report.
Individual pension plans are increasingly common because the employee sets up, funds and controls one's own pension plan, rather than leaving the moneys under the control of the employer or a bank.
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