CH 17

(TRUE or FALSE?) A benefit formula such as 0.02 x years of service x final salary applies to defined benefit plans. Select one: a. FALSE b. TRUE

TRUE

(TRUE or FALSE?) With a defined benefit plan that has backend loading of benefits, the employees have less incentive to leave the firm. Select one: a. TRUE b. FALSE

TRUE

(TRUE or FALSE?) With a defined benefit plan, an employer promises employees a benefit during retirement that is defined by a formula based on factors such as years of service and final salary. Select one: a. FALSE b. TRUE

TRUE

Which of the following statement is incorrect? Select one: a. One of the similarities of a traditional IRA and a Roth IRA is that investment earnings are taxable when received in a traditional IRA and in a Roth IRA. b. ERISA established PBGC to insure the promised benefits of employees who participate in underfunded plans that terminate. c. Investing in blue-chip stocks with high dividends in a qualified pension plan makes sense. d. One measure of pension plan adequacy is the replacement rate, which is the retirement benefit as a percentage of final salary. e. Most of the answers are correct.

a. One of the similarities of a traditional IRA and a Roth IRA is that investment earnings are taxable when received in a traditional IRA and in a Roth IRA.

Which of the following is correct? Select one: a. Traditional IRA plans do not provide tax deductibility for contributions but provides tax-deferred benefits b. Keogh plans are designed to accommodate large firms with many employees c. In a 401(k) plan both employees and employers can contribute d. none of the answers is correct e. Employee Stock Ownership Plans creates a well-balanced portfolio

c. In a 401(k) plan both employees and employers can contribute

Which of the following investments makes the least sense for a qualified pension plan? Select one: a. none of the answers is correct b. corporate bonds c. growth stocks d. dividend paying stocks e. tax free municipal bonds

e. tax free municipal bonds

(TRUE or FALSE?) The frontend loading of retirement benefits implies that employers can suffer large losses in the value of their retirement benefits if they invest into the firm or if the firm leaves the plan overfunded. Select one: a. TRUE b. FALSE

FALSE

(TRUE or FALSE?) When defined contribution pension plan's assets exceed its liabilities, the plan is underfunded. Select one: a. FALSE b. TRUE

FALSE

(TRUE or FALSE?) A qualified plan receives tax advantages in that the contributions are taxable as personal income before the benefits are received. Select one: a. TRUE b. FALSE

FALSE

(TRUE or FALSE?) Employee Stock Ownership Plans (ESOPs) invests primarily in a market portfolio so that the employees hold diversified portfolios. Select one: a. TRUE b. FALSE

FALSE

(TRUE or FALSE?) The primary reasons why employers offer retirement plans are to increase taxes for employers and to reduce labor productivity. Select one: a. FALSE b. TRUE

FALSE

(TRUE or FALSE?) Investing in growth stocks with high dividends in a qualified pension plan makes sense. Select one: a. FALSE b. TRUE

TRUE

(TRUE or FALSE?) Investment earnings are not taxed in Roth IRAs. Select one: a. TRUE b. FALSE

TRUE

Which of the following statement is correct? Select one: a. All the answers are incorrect. b. Often the benefit formula in a defined contribution plan is structured so that benefits are strongly frontend loaded. c. Underfunded defined benefit plans has pension assets greater than pension liabilities. d. With money purchase plans, the contributions are usually equal to a percentage of the employee salary. e. Pension Benefit Guaranty Corporation (PBGC) Insures defined contribution plans.

d. With money purchase plans, the contributions are usually equal to a percentage of the employee salary.

Which of the following is incorrect about the advantages of employment-sponsored retirement plans? Select one: a. employment-sponsored retirement plans can reduce employee turnover b. none of the answers is correct c. employment-sponsored retirement plans can improve employee productivity d. employment-sponsored retirement plans receive special tax treatment e. employment-sponsored retirement plan savings can be accessed by employees without restrictions

e. employment-sponsored retirement plan savings can be accessed by employees without restrictions

The problem of overfunding and underfunding of pensions plans is unique to which of the following types of pension plans? Select one: a. profit-sharing plans b. none of the answers is correct c. defined benefit plans d. 401(k) plans e. defined contribution plans

c. defined benefit plans

One of the differences between a traditional IRA and a Roth IRA is that: Select one: a. earnings are taxed when received in a traditional IRA but not in a Roth IRA b. contributions to a Roth IRA are not tax deductible but traditional IRA contributions are tax deductible. c. withdrawals during retirement from a traditional IRA are not taxed and withdrawals from a Roth IRA are taxed d. earnings are taxed when received in both traditional IRA and in a Roth IRA e. none of the answers is correct

b. contributions to a Roth IRA are not tax deductible but traditional IRA contributions are tax deductible.

Which of the following statement is correct? Select one: a. Pension Benefit Guaranty Corporation (PBGC) insurance is not compulsory to buy for the employers that offer the defined benefit pension plans. b. If an employer decides to use cliff vesting, the maximum length of service that can be required of an employee before vesting occurs is 2 years. c. The tax advantages of qualified retirement plans include dividend and interest earnings in the retirement plan are being subject to income tax before received as benefits. d. All the answers are incorrect. e. Contributions are not tax deductible in Roth IRAs.

e. Contributions are not tax deductible in Roth IRAs.

Which of the following statement is correct? Select one: a. The backend loading of retirement benefits increases turnover among the employees. b. Investment earnings are not tax deferred with the traditional IRAs. c. An employee can earn the before-tax rate of return in a qualified plan. d. The tax advantages of qualified retirement plans include contributions paid by employers are taxable in the year they are made. e. All the answers are incorrect.

c. An employee can earn the before-tax rate of return in a qualified plan.

Which of the following statement is incorrect? Select one: a. Most of the answers are correct. b. Section 401(k) plans are defined contribution plans. c. A benefit formula such as 0.02 x years of service x final salary applies to defined contribution plans. d. Contributions are not tax deductible in Roth IRAs. e. Profit sharing plans have contributions usually based on firm's profits.

c. A benefit formula such as 0.02 x years of service x final salary applies to defined contribution plans.

Which of the following statement is incorrect? Select one: a. If defined benefit plan sponsor goes bankrupt and the plan was underfunded, the Deposit Insurance and Credit Guarantee Corporation (DICGC) will pay promised benefits calculated at the time of termination up to a maximum. b. With Defined Benefit (DB) plans, the monthly benefit during retirement is defined by a formula based on factors such as years of service and final salary. c. Most of the answers are correct. d. Individual Retirement Accounts (IRAs) allow people who are not participants in employer-sponsored plans to save for retirement and receive the same tax benefits as qualified plans. e. Pension Benefit Guaranty Corporation (PBGC) pays benefits of terminated underfunded defined benefit plans.

a. If defined benefit plan sponsor goes bankrupt and the plan was underfunded, the Deposit Insurance and Credit Guarantee Corporation (DICGC) will pay promised benefits calculated at the time of termination up to a maximum.

Which one of the following shows the most common vesting for a defined benefit plan? Select one: a. either a 2-year cliff vesting or 1st year graded vesting with 20% increments b. either a 5-year cliff vesting or 3rd year graded vesting with 20% increments c. either a 3-year cliff vesting or 2nd year graded vesting with 20% increments d. either a 4-year cliff vesting or 5th year graded vesting with 20% increments e. none of the answers is correct

b. either a 5-year cliff vesting or 3rd year graded vesting with 20% increments

The main difference between 401(k) plans and other defined contribution plans is that: Select one: a. there is a higher limit on how much the employer can contribute. b. the employee can elect to make tax deferred contributions to the plan. c. none of the answers is correct d. there is no limit on how much the employer can contribute. e. the employee is required to contribute to the plan.

b. the employee can elect to make tax deferred contributions to the plan.

A qualified retirement plan means: Select one: a. the plan satisfies the conditions that it is non-discriminatory and inclusive for all employees, and therefore it is approved by the Federal Reserve Bank b. the plan satisfies the conditions that it is non-discriminatory and inclusive for all employees, and therefore it is approved by the IRS c. the plan requirement of at least 60% of the contributions being invested in municipal or federal bonds is satisfied d. none of the answers is correct e. the plan requirement of at least 40% of the contributions being invested in municipal or federal bonds is satisfied

b. the plan satisfies the conditions that it is non-discriminatory and inclusive for all employees, and therefore it is approved by the IRS

Which of the following statement is incorrect? Select one: a. A defined contribution plan that is invested entirely in the sponsoring firm's stock may be bad for participants because it forces them to have a relatively undiversified portfolio. b. When defined benefit pension plan's assets exceed its liabilities, the plan is overfunded. c. The most common type of defined benefit plan is the money purchase plan in which the employer makes an annual contribution, usually a fixed percentage of the employee's salary, on behalf of the employee regardless of the firm's profits. d. The backend loading of retirement benefits implies that employees can suffer large losses in the value of their retirement benefits if they leave the firm or if the firm terminates the plan prior to retirement. e. Most of the answers are correct.

c. The most common type of defined benefit plan is the money purchase plan in which the employer makes an annual contribution, usually a fixed percentage of the employee's salary, on behalf of the employee regardless of the firm's profits.

Which of the following statement is incorrect? Select one: a. The problem of overfunding and underfunding of pensions plans is unique to defined benefit plans. b. Most of the answers are correct. c. There are no incentive effects of an employer-sponsored plan and it can decrease productivity with lesser employee effort and higher quit rates. d. Investing in blue-chip stocks with high dividends in a qualified pension plan makes sense. e. With a defined benefit plan that has backend loading of benefits, the employees have less incentive to leave the firm.

c. There are no incentive effects of an employer-sponsored plan and it can decrease productivity with lesser employee effort and higher quit rates.

Which of the following statement is correct? Select one: a. With defined benefit (DB) plans, the contribution to a fund is defined by a formula. b. Overfunded defined benefit plans has pension assets less than pension liabilities. c. The primary reasons why employers offer retirement plans are to increase taxes for employers and to reduce labor productivity. d. With Defined contribution (DC) plans, the employee bears the investment risk. e. All the answers are incorrect.

d. With Defined contribution (DC) plans, the employee bears the investment risk.

Which of the following statement is correct? Select one: a. Investing in blue-chip stocks with high dividends in a qualified pension plan does not make any sense. b. A benefit formula such as 0.02 x years of service x final salary applies to defined contribution plans. c. A qualified plan receives tax advantages in that the earnings on assets are taxed before they are received. d. All the answers are incorrect. e. 401(k) plans are similar to money purchase plans, except that the employees can elect to make contributions.

e. 401(k) plans are similar to money purchase plans, except that the employees can elect to make contributions.

The tax advantages of qualified retirement plans include all of the following except: Select one: a. dividend and interest earnings in the retirement plan are not subject to income tax until received as benefits. b. contributions to the plan are not subject to income tax until received as benefits. c. none of the answers is correct d. contributions paid by employers are tax deductible in the year they are made. e. earnings on assets in qualified retirement plans are subject to lower capital gains tax rates.

e. earnings on assets in qualified retirement plans are subject to lower capital gains tax rates.

A defined contribution plan that is invested entirely in the sponsoring firm's stock: Select one: a. is violating the law because employer stock is limited to no more than 10% of plan assets. b. makes a firm more likely to be a takeover target. c. has been shown to increase employee productivity by 10%. d. none of the answers is correct e. may be bad for participants because it forces them to have a relatively undiversified portfolio.

e. may be bad for participants because it forces them to have a relatively undiversified portfolio.