Identification

• A pension plan which operates using insurance policies is called a 412i plan. A 412i plan invests exclusively in fixed life insurance and annuity policies. No other investments may be made, and all benefits are guaranteed. The plan is also referred to as a defined benefit plan. This plan specifically uses insurance as the guarantee, whereas other defined benefit plans may not use insurance to guarantee payments.
  
  

Significance

• Your employer must hire an actuary to calculate the required contribution amount for the plan. These contributions must be made every year. You are not able to make additional contributions to the plan as an employee. All interest rates and investment earnings for the plan are known in advanced and are fixed for the life of the plan.
  
  

Benefit

• The benefit of a 412i plan is guaranteed income at retirement. The only risk of not receiving an income is if the insurance company issuing the policies fails, but according to economist Jesus Huerta deSoto, insurance companies rarely fail.
  
  

Disadvantage

• The employer's responsibility for the plan is substantial. Contributions are normally very large and must be sustained for a long time. Because interest rates are guaranteed on the plan, the rate of return is low. This necessarily means that contributions must be higher than if a higher interest rate assumption were used. Your employer may suffer financial difficulty by committing to long-term plan contributions or he may be forced to forgo business expansion due to a significant financial commitment to the pension plan.