Underfunded Defined-Benefit Plan

A

In the context of a defined-benefit plan, the present value of the promised benefits refers to the estimated amount of money required to fulfill the future pension obligations to plan participants. This value is calculated based on various factors such as the participants' expected retirement age, average life expectancy, salary levels, and assumed rates of return on plan assets.

When the assets held within a defined-benefit plan are worth less than the present value of the promised benefits, it indicates a shortfall in the plan's funding. In other words, the plan does not have enough assets to cover the projected pension obligations.

The correct answer to the question is A. underfunded.

Underfunded means that the plan has insufficient assets to meet its present and future obligations. This situation can occur due to various reasons such as poor investment performance, inadequate contributions, changes in actuarial assumptions, or an increase in promised benefits. When a plan is underfunded, there is a risk that it may not be able to pay all the promised benefits to retirees.

It is important to note that the opposite scenarios exist as well. If the assets in a defined-benefit plan exceed the present value of the promised benefits, the fund is considered to be overfunded (option C). Overfunded means that the plan has more than enough assets to cover its current and future obligations. In this case, the plan may have a surplus, which could allow for reduced contributions or additional benefits.

Unfunded (option B) refers to a situation where there are no assets set aside to meet the pension obligations. This typically occurs when a defined-benefit plan has not been funded adequately or when an employer has not established a fund to cover the promised benefits.

Fully funded (option D) means that the assets in a defined-benefit plan are exactly equal to the present value of the promised benefits. In this scenario, the plan has sufficient assets to meet all its obligations, leaving no shortfall or surplus.

Given the information provided, the correct answer is option A. underfunded, as it accurately describes the situation when the assets in a defined-benefit plan are worth less than the present value of the promised benefits.