A quick yearly notice that explains a pension plan’s financial health and funding level.
An Annual Funding Notice is a required yearly disclosure that tells participants how well their defined benefit pension plan is funded. It shows the plan’s assets, liabilities, investment strategy, and information about PBGC guarantees. It’s a helpful way for workers and retirees to understand the stability of their pension benefits—without suggesting that the plan is shutting down or taken over.
Understanding the Annual Funding Notice
The Annual Funding Notice is sent to participants, beneficiaries, labor organizations, and other required parties under federal law. It applies to both single-employer and multiemployer defined benefit plans covered by Title IV of ERISA.
At its core, this notice provides a clear snapshot of the pension plan’s financial status for the year. While many people skim the letter or worry when they see long financial numbers, the notice is simply an informational document designed to keep participants informed and empowered.
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What Information Does the Annual Funding Notice Include?
Although the format may vary from plan to plan, ERISA requires specific information to be included. Typically, the notice explains:
1. The Value of Plan Assets
This section shows how much money the pension plan currently holds. These assets come from employer contributions, investment returns, and sometimes employee contributions.
2. The Value of Plan Liabilities
Liabilities represent the total amount the plan expects to pay out in promised pension benefits over time. This number helps participants understand whether the plan has enough resources to meet future obligations.
3. The Plan’s Funding Percentage
This is one of the most important parts of the notice.
The funding percentage is calculated by dividing:
Plan Assets ÷ Promised Pension Benefits (Liabilities)
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A percentage close to or above 100% suggests the plan is well-funded.
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A lower number may indicate that the employer will need to contribute more in the future.
4. How the Plan’s Assets Are Invested
This includes a breakdown of the investment strategy, such as the percentage allocated to stocks, bonds, real estate, or other asset classes. It helps participants understand how the plan aims to grow and protect its funds.
5. PBGC Guarantee Information
The notice must also explain which plan benefits may be guaranteed by the Pension Benefit Guaranty Corporation (PBGC) if the plan ever becomes unable to pay benefits. This is not a sign that the plan will fail—just required information for transparency.
What the Annual Funding Notice Does Not Mean
Receiving an Annual Funding Notice does not indicate:
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Your pension plan is ending
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Your employer is in financial trouble
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PBGC has taken over your plan
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Your benefits are being reduced
It is simply a mandated communication that all defined benefit plans must provide every year.
If anything in the notice is unclear, participants are encouraged to contact the plan sponsor or employer. They are the best source for details about how the plan operates and what the numbers mean for individual benefits.
Real-Life Example
Imagine you work for a manufacturing company with a traditional pension plan. Each spring, you receive a letter titled “Annual Funding Notice.” Inside, you see:
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Assets: $350 million
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Liabilities: $400 million
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Funding Percentage: 87.5%
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Investment mix: 60% bonds, 30% equities, 10% alternatives
This tells you the plan is slightly underfunded but still functioning normally, and your employer will likely continue making contributions to close the gap. Nothing in the notice suggests your benefit is at risk.
Summary
The Annual Funding Notice is a straightforward, legally required update that shows participants how well their pension plan is funded. It explains assets, liabilities, the funding percentage, the investment strategy, and PBGC guarantee details. Ultimately, it helps workers and retirees stay informed about the long-term stability of their pension benefits.
