Retirement Planning - Module 2

Assume a company's goal is to maximize retirement benefits to the highly compensated employees, who also happen to be the oldest employees. Which of the following best accomplishes this goal if the company is installing a new plan?

A defined benefit pension plan

Which of the following is a type of traditional defined benefit pension plan?

A fully insured Section 412 (e)(3) pension plan

Fernando, age 45, participates in his employer's defined benefit pension plan. This plan provides for a retirement benefit of 2% of earnings for each year of service with the company and, given Fernando's projected service of 20 years, will provide him with a benefit of 40% of final average pay at age 65. What type of benefit formula is this plan using?

A unit benefit formula

Which of the following is CORRECT about contributions made to a cash balance pension plan?

All contributions are made by the employer.

Which of the following is a defined benefit pension plan that promises a benefit based on a hypothetical account balance versus a traditional defined benefit pension plan, which promises a monthly retirement benefit for life?

Cash balance pension plan

Frank and his daughter, Joan, own and operate a gravel pit. Frank is age 55 and hopes to retire when he reaches age 65. Joan is age 33 and plans to continue operating the business after Frank retires. Currently, Frank owns 70% of the corporation and Joan owns the remaining 30%. Frank's current income from the corporation is $100,000. They have established a target benefit plan; Frank's account has been earning 8%, and the balance is currently $67,590. Based upon an analysis of Frank's cash flow, you and he have determined that he will need annual retirement income of $75,000 in today's dollars. With this information, which of the following best describes how the target benefit plan will provide for Frank's and Joan's retirement? Considering Joan's age, a money purchase plan would be more beneficial to her. Frank can anticipate that the age-weighted nature of the target benefit plan will provide the bulk of his needed retirement income. Based upon the present investment return, the target benefit plan may provide Frank with less than 40% of the income that he will need at retirement. For Frank, a target benefit plan will not provide adequate retirement income for him to meet his retirement income objective because of the 25% limit on deductions for employer contributions; additional methods of saving for retirement need to be explored.

I, III, and IV

Which of the following statements regarding fully insured Section 412(e)(3) plans is CORRECT? A fully insured Section 412(e)(3) plan is a type of defined benefit plan. All fully insured Section 412(e)(3) plans must meet minimum funding standards each plan year. This type of plan is not required to be certified by an enrolled or licensed actuary. A fully insured plan is inappropriate for an employer who cannot commit to regular premium payments.

I, III, and IV

In which of the following ways are target benefit pension plans similar to money purchase pension plans? Pension Benefit Guaranty Corporation (PBGC) insurance is required. The actual dollar retirement benefit is guaranteed. The employee bears the investment risk. Each employee has an individual account.

III and IV

Which of the following is correct about how the performance of a given variable will impact the employer costs and thus the contribution to a defined benefit plan?

If mortality is greater than expected, the employer contribution will decease.

In which of the following ways is a target benefit pension plan similar to a traditional defined benefit pension plan?

It benefits older employees

What is the maximum annual contribution by an employer to a plan participant's money purchase pension plan account in 2022?

Lesser of 100% of employee compensation, or $61,000

An increase in which of the following factors will increase plan costs for a defined benefit pension plan?

Life expectancies

This year, its pension actuary informed Gear-It-Up Bicycles, Inc., that its required annual contribution to the company defined benefit pension plan needs to be significantly higher than last year. Which of the following factors could be responsible for this increase in annual contributions?

Lower-than-expected earnings on plan investments

Ross, age 75, works for Financial Strategies, Inc. The company has a long-established retirement plan. The plan does not require an actuary or Pension Benefit Guaranty Corporation (PBGC) insurance, but the employer is required to make annual mandatory contributions to each employee's account. What type of retirement plan was established by Financial Strategies?

Money purchase pension plan

Which of the following statements is a disadvantage for the employer-sponsor of a cash balance pension plan?

Retirement benefits may be inadequate for older plan entrants.

Which of the following is a hybrid retirement plan that uses an actuarially designed benefit formula like that of a traditional defined benefit plan and individual accounts like that of a defined contribution plan?

Target benefit pension plan

Which of the following is a retirement plan that requires the initial services of an actuary, the employee assumes the investment risk, and it favors older plan participants?

Target benefit pension plan

Great Benx Corporation provides both a defined benefit plan and a money purchase plan for its employees. The defined benefit plan is covered by the PBGC. All employees participate in each plan. If the Section 415 limits apply, how do they pertain to this plan?

The Section 415 limits are applied separately for each plan. The annual additions limit for the money purchase plan in 2022 is 100% of the participant's compensation or $61,000, whichever is less. The participant's benefit in the defined benefit plan is limited in 2022 to 100% of the participant's compensation or $245,000, whichever is less.

Which of the following statements is CORRECT in describing the effects of actuarial methods or assumptions on contributions to a defined benefit pension plan?

The higher the turnover rate assumed by the actuary, the lower the required employer contribution for the year.

Which of the following statements regarding target benefit pension plans is FALSE?

The ultimate account balance for the employee's account is guaranteed by the plan.

ERISA requires reporting and disclosure of defined benefit plan information to

plan participants.

Three common formulas for determining annual retirement benefits from a defined benefit plan include all of the following except

the dollar percentage matrix.

A money purchase pension plan is a defined contribution plan in which

the employer typically contributes a fixed percentage of participant compensation each year.

Tax implications of cash balance pension plans include which of these? Employer contributions on behalf of employees grow tax deferred. Employer contributions to the plan are deductible when made. Annual retirement benefits are limited to $305,000 (2022). There are no penalties for distributions before age 59½.

I and II

Joe, age 52, has owned his company for 18 years and wishes to retire at age 70. All of Joe's employees are older than he is and have an average length of service with the company of eight years. Joe would like to adopt a qualified retirement plan that would favor him and reward employees who have rendered long service. Joe has selected a traditional defined benefit pension plan with a unit benefit formula. Which of the following statements regarding Joe's traditional defined benefit pension plan is CORRECT?

A traditional defined benefit plan with a unit benefit formula will maximize Joe's benefits and reward long-term employees based on years of service.

Dan, age 54, is the sole owner of his company. His company is now experiencing considerable financial success, but he remembers the past when the company really struggled. Consequently he would like any new retirement plan to be backed by the PBGC. Which of these types of retirement plans are backed by the PBGC?

Defined benefit plan

Which of the following describe money purchase pension plans? The participant's final account balance determines the actual retirement benefit. The maximum annual contribution is the lesser of 100% of eligible compensation or $61,000 (2022). The employer bears the investment risk. The plan requires the services of an actuary.

I and II

Which of the following statements are advantages for the employer-sponsor of a cash balance pension plan? A certain level of plan benefit is guaranteed by the PBGC. The employer bears the investment risk in the plan. Cash balance pension plans are less expensive to administer for the employer than traditional defined benefit pension plans. Retirement benefits may be inadequate for older plan entrants.

I and III

Which of the following apply to money purchase pension plans? The normal retirement benefit must be specified in the plan. The formula is a specified percentage of each employee's annual compensation. While the amount of final benefit is not guaranteed or promised, there is an employer promise to contribute to the plan each year. A separate account must be maintained for each participant.

II, III, and IV

Under which of the following circumstances is a target benefit plan the most appropriate choice for small-business owners? To simplify and reduce the cost of eliminating a defined benefit plan (without termination) by amending it into a target plan Where the employer wants to provide larger retirement benefits for key employees who are significantly older than the other employees To meet the employer's goal of maximizing deductible contributions to provide benefits for older, highly compensated employees Where the employer is opposed to assuming the investment risk and prefers the simplicity of a separate account plan

II, IV