It may sound like a term some kid's music teacher uses on tax forms to describe a rented bassoon. But in reality, it has to do with pensions.
If you run a pension plan (or even if you just belong to a fantasy pension league) you can use an allocated funding instrument to pay your retired workers. Basically, the employer buys an annuity contract from an insurance company. Employee contributions are paid into the plan, essentially covering the annuity premiums. In retirement, the insurance company pays out the benefits, taking the burden off the employer to cover the ongoing benefits.
The allocated funding instrument has the benefit of being backed by an insurance company, which is in a better position to guarantee that the annuity will be paid. If a pension plan attempts to manage the funds itself, there is an increased risk that the plan will become underfunded if investment growth rates fall behind expectations. This can lead to a situation down the road where pension obligations dramatically outstrip the funds it has available (remember, pension plans have to keep multi-decade timelines in view).
Passing some of the burden off to an insurance company by buying an allocated funding instrument limits this risk.
Related or Semi-related Video
Finance: What is a 501c3?8 Views
Finance a la shmoop... what is a 501c3.... well it's a charity people and it [Man discussing 501c3 charity]
sounds way cooler if you call it a number and with a letter than a number
right 501cPO...remember 007 yeah, way cooler than just
James right all right well 501c3 is the United States legal code number that
created space for federally tax-exempt charities that's a C there; C for
charity and there are 29 flavors of charitable category that they addressed [Ice cream flavors]
now the government's working hard to catch up to baskin-robbins numbers but
they're not there yet specifically some of those 29 flavors [Girl given an ice cream cone]
include religious organizations, scientific literary or educational
charities, charities for amateur sports, testing for public safety kind of
charities yeah like the crash dummies charities involving cruelty to children [Woman on a swing with a child]
women and animals and yeah most of these are anti so why the special treatment
well if a 501c3 follows the many strict rules to maintain its nonprofit status
then donors giving money to it get to deduct that money right off the top when [Donor gives money to charity]
they're doing their taxes like if a tax payers paying 40 percent marginal tax
and they donate a dollar well that dollar only costs um 60 cents to donate
the US government essentially underwrites charitable donations at
least to a point like they forgive 40 cents of tax in that dollar and that's a
good thing we need noblesse oblige charities in the world they do good work
well most of them do.. [People standing behind charity stalls]
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