Participant-mix and management of qualified pension plans

Abstract

ABSTRACT: This paper examines if the management of qualified pension plans is affected by the mix of plan participants. Evidence is presented that defined‐benefit pension plans that are dominated by highly compensated employees tend to contribute beyond the minimum amount required under the Internal Revenue Code (flow effect), resulting in overfunded plans (stock effect), and then use of aggressive actuarial assumptions to disguise the overfunding to avoid visibility costs (reporting effect). These effects are less likely when the sponsoring firm has an active labor union (monitoring effect). These findings will be of interest to the federal government, Pension Benefit Guaranty Corporation, employees, and labor unions.