Please read and respond to the following three questions: In 1998, over 90% of the Fortune 100 companies offered defined benefit plans. By 2012, the percentage offering such plans had dropped to 30%

Please read and respond to the following three questions:

In 1998, over 90% of the Fortune 100 companies offered defined benefit plans. By 2012, the percentage offering such plans had dropped to 30%.

A. What factors contributed to the shift towards more defined contribution plans?

B. Read the 2012 article from the NY Times re-printed below. Explain how investment returns and interest (discount) rates impact the pension obligations.

C. The article focuses on corporate pensions, what other entities offer pension and what is their funding status?

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Current Event – Pensions
Please read and respond to the following three questions:
In 1998, over 90% of the Fortune 100 companies offered defined benefit plans.
By 2012, the
percentage offering such plans had dropped to 30%.
A. What factors contributed to the shift towards more defined contribution plans?
B. Read the 2012 article from the NY Times re-printed below.
Explain how investment returns
and interest (discount) rates impact the pension obligations.
C.
The article focuses on corporate pensions, what other entities offer pension and what is their
funding status?
Private Pension Plans, Even at Big Companies, May Be 
Underfunded
By
FLOYD NORRIS
Published: July 20, 2012
Facebook
AFTER years of poor investment returns, the pension funds of the United States’ largest 
companies are further behind than they have ever been. 
Underfunded Pensions
The companies in the Standard & Poor’s 500 collectively reported that at the end of their 
most recent fiscal years, their pension plans had obligations of $1.68 trillion and assets of 
just $1.32 trillion. The difference of $355 billion was the largest ever, S.& P. said in a report. 
Of the 500 companies, 338 have defined-benefit pension plans, and only 18 are fully funded. 
Seven companies reported that their plans were underfunded by more than $10 billion, with 
the largest negative figure, $21.6 billion, reported by General Electric. 
The other companies with more than $10 billion in underfunding were AT&T, Boeing, Exxon 
Mobil, Ford Motor, I.B.M. and Lockheed Martin. JPMorgan Chase had the largest amount of 
overfunding, $1.6 billion. 
The main cause of the underfunding at many companies does not appear to be a failure to 
make contributions to the plans. Instead, it reflects the fact that investment markets have not 
performed well for a sustained period. 
As the accompanying charts show, over the last 15 years, the S.& P. 500 rose at an annual 
rate of less than 5 percent, even with dividends reinvested. Not since 1945 had a 15-year 
period been so bleak for the stock market. The Barclays Capital U.S. Aggregate Bond Index, 
which includes all investment grade bonds, returned 6.3 percent, but that, too, was lower 
than it had been for a long time. 

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Virtually all pension funds had assumed returns would be better, leaving them underfunded 
when their investments failed to perform as expected. 
The prolonged poor performance of stocks has led some companies to move away from 
them. Seven years ago, S.& P. said, stocks made up 65 percent of pension-fund assets and 
bonds made up 29 percent, with the remaining assets in real estate and other investments, 
like 
private equity
 funds. By last year, stocks were down to 48 percent and bonds up to 41 
percent. 
The stock market’s poor performance has also convinced some companies that they no 
longer want to take the risk of guaranteeing pension payments. Many have closed their 
pension plans to newer employees and stopped accruing benefits for workers already in 
them. Instead, they have pushed employees into defined-contribution plans, in which the 
worker, not the employer, bears the risk of poor investment performance. 
Determining whether pension funds have adequate funding is, to some extent, a work of art. 
Companies estimate what they will owe in the future, and then discount that number based 
on how long it will be until they have to pay it and the interest rate at which their pension-
plan investments could grow. The discount rate used can have a significant effect. 
For example, if a company estimated it would owe $1 million in 10 years and used an 8 
percent discount rate, the current obligation would be $434,000. If it chose a 3 percent rate 
instead, the current obligation would be $737,000. 
Next year, pension funds will appear to be better funded, even if they are not. Congress 
voted this year to allow funds to discount their obligations using a 15-year average of bond 
yields, meaning they can use a higher rate and so report lower obligations. 
General Electric announced on Friday that it would slash its pension contributions as a result 
of the new law, and many other companies are expected to do the same. 
Because such contributions are tax-deductible, lower deductions may mean higher tax bills, 
which would increase government revenue, at least for a few years. 
Of course, markets will do whatever they will do, regardless of the assumptions pension-fund 
sponsors make. In the long run, contributing less now may simply mean companies have to 
contribute more later. 
Underfunded Pensions

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