When a retirement plan is fully funded, it's the result either of money you've contributed or of cash deposited by your employer. A fully funded retirement plan is one in which the participants -- either the plan member or plan sponsor -- are maximizing the available resources to adequately prepare for your retirement. Once you or your employer have done your part to get the plan well-funded, it's up to the investments in which the money is directed to keep the funding status strong.
The beauty of a fully funded defined benefit pension plan is that it's the responsibility of the plan sponsor, which is usually the employer, to provide the cash deposits. A fully funded pension is one with a 100 percent funding status, which means there's enough dough to cover retirement liabilities. If a pension's at least 80 percent funded, it's considered healthy. In fiscal 2009, the average funding status for city pension funds was only 74 percent, according to analysis provided by the Pew Center and cited in a 2013 article on the Pensions and Investments website.
Unfortunately, a fully-funded pension can give you a false sense of security. Auto maker General Motors was once considered to have the gold-standard of pension plans. Although the plan was once fully funded, the company fell into bankruptcy in 2009. Even after beginning to collect retirement checks, thousands of retirees were eventually asked to make a change. They could either exchange the steady income for a lump-sum payment, which might or might not last through retirement, or agree to have the plan transferred to financial firm Prudential Financial, according to a 2012 article on the MSN Money website.
If you happen to be part of a defined contribution plan, such as a 401(k), you're primarily responsible for the funding status of the plan. You can't just direct 100 percent of your paycheck into the plan, however, because the U.S. Internal Revenue Service puts a cap on deposits each year. For instance, for tax year 2013, the cash contribution limit was $17,500, which represented a $500 increase over the previous year's limit, according to a 2012 CBS Money Watch article. If you make the maximum allowed contribution and you take advantage of any matching programs that your employer has in place, your 401(k) plan is fully funded.
If your employer doesn't provide a retirement plan, you might invest in an individual retirement arrangement. A traditional IRA and a Roth IRA both would be considered fully funded if you have made the maximum allowed contribution, which for tax year 2013 is $5,500. A Roth IRA is funded with after-tax income, but you pay no tax on earnings and withdrawals -- assuming you take no distributions until the account has been open for least five years and you are at least 59 1/2 years old. With a traditional IRA, you may deduct contributions up to the maximum allowed amount, but you must pay income tax on contributions and earnings at the time of withdrawal.
- Pensions and Investments: Pew Study Finds Dismal Funded Status for Most U.S. City pension Plans
- The Pew Charitable Trusts: The Widening Gap Update
- CBS Money Watch: 401(k) Contribution Limit to Rise in 2013
- Dave Ramsey: Roth IRA 101
- IMRF: IMRF Members -- What 100% Funding Means to You
- MSN Money: Is Your Pension Safe?
- CNN Money: GM Bankruptcy -- End of an Era
- Wells Fargo: Traditional IRA
- Thomas Northcut/Photodisc/Getty Images
- Why Choose a Non Qualified Retirement Plan?
- How Is a 401(A) Different From a 401(K)?
- 403b Retirement Plan vs. 401K
- What Are My Retirement Plan Options If I Have No Plan Through My Employer?
- How to Change Your 401(k) Contributions
- The Tax Advantages of Working Over Age 60
- What Are the Main Solutions to Debt Problems?
- Categories of Retirement Savings
- How Do Interest Rates Affect Retirement Plans?
- When Can You Withdraw From a 457 Deferred Compensation Plan?