Suppose a new employee is promised a pension payment of $8000 in the twenty-fourth year after joining the firm. The current pension contribution of $1200 a year. Assuming an eight percent rate of return, this pension plan is said to be

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The pension plan is partly funded because the current contributions of $1200 a year are insufficient to cover the promised pension payment of $8000 in the 24th year. The plan assumes an eight percent rate of return, which could help to bridge the gap between contributions and the promised payment, but it is still underfunded. A fully funded plan would have sufficient contributions and investment returns to cover all promised payments, while an unfunded plan relies solely on the employer's ability to pay as the payments come due. Full vesting refers to an employee's right to the full amount of promised benefits after a certain amount of service time.

Suppose a New Employee Is Promised a Pension Payment of $8000