Chapter 17 graded hw

Which of the following investments makes the least sense for a qualified pension plan?

a. tax free municipal bonds

A qualified retirement plan means:

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

A defined contribution plan that is invested entirely in the sponsoring firm's stock:

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

The problem of overfunding and underfunding of pensions plans is unique to which of the following types of pension plans?

c. defined benefit plans

Which one of the following shows the most common vesting for a defined benefit plan?

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

Which of the following is incorrect about the advantages of employment-sponsored retirement plans?

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

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

correct

a. Contributions are not tax deductible in Roth IRAs.

correct

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

correct

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

correct

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

correct

The tax advantages of qualified retirement plans include all of the following except:

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

The main difference between 401(k) plans and other defined contribution plans is that:

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

One of the differences between a traditional IRA and a Roth IRA is that:

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

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

false

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

false

(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.

false

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

false

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

false

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

incorrect

b. 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.

incorrect

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

incorrect

c. 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.

incorrect

e. 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.

incorrect

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

true

Which of the following is correct?

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

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

true

(TRUE or FALSE?) Investment earnings are not taxed in Roth IRAs.

true

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

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.

true