450 Exam 1

A unit benefit formula is designed to _________________ A.) Provide a set % of FAC for each year of service B.) Limit benefit accruals for all DB funds past 35 years of service C.) Favor those earnings bonuses rather than overtime

A

A unit benefit formula is designed to ____________________. A.) provide a set percentage of FAC for each year of service. B.) limit benefit accruals for all DB funds past 35 years of service. C.) favor those earning bonuses rather than overtime.

A

What is the status quo tendency? A.) This is a psychological bias that makes us think that our current experience will never end. B.) This is a psychological bias that actually spurs people to plan for their futures...harness the power! C.) This is a psychological bias that makes you wish that time stopped in the 1980s.

A

Which of the following is a character trait unique to the Defined Contribution plan type? A.) The participant bears all investment risk. B.) Total contributions are limited to $220,000 C.) The employer bears all investment risk. D.) DC plans have backstop coverage from the PBGC

A

Which of the following is not a reason why a business owner might want to offer a plan? A.) Exclude rank-and-file employees B.) Attraction of key talent C.) Shelter from bankruptcy

A

Which of the following is not a reason why an employee would choose a SEP plan? A.) Account for past service B.) Flexible Contributions C.) Low cost administration

A

For the last two years, Sally (age 41) owned 6% of her employer's voting stock. She is paid an annual salary of $65,000. Sally is considered to be a ________________________. A.) Highly Compensated Employee B.) good candidate for an annuity. C.) Non-Highly Compensated Employee

A Regardless of the amount of Sally's salary, she owns more than 5% of the company...therefore she is a highly compensated employee.

A plan sponsor for a Money Purchase Pension Plan should have _____________________. A.) a good system for deducting contributions from employee payroll. B.) stable cash flow to handle the required contribution. C.) a pizza party every Friday.

B

One reason to select a defined benefit plan is to _____________________. A.) have a predictable cost structure. B.) provide for past service. C.) give all contributions to the owners.

B

One reason to select a defined benefit plan is to _____________________. A.) have a predictable cost structure. B.) provide for past service. C.) give all contributions to the owners.

B

Retirement planning is a ___________ that requires an active tradeoff between _______________ and __________________. (pick the best answer) A.) challenge, husband, wife B.) process, saving, spending C.) puzzle, saving, taking exotic vacations. D.) process, low debt, high returns

B

Which of the following is not a factor in considering when to start planning for retirement? A.) Starting earlier means that a smaller amount needs to be saved each month to reach the same goal (all else equal) B.) Waiting until student loans are paid off at age 40 is better than making too many financial sacrifices early in your career. C.) Starting later means that the ratio of accumulation years to liquidation years is smaller (and this is a bad thing) D.) Saving early and then stopping can be better than waiting too long to start saving.

B

Which person below is considered to be a "key employee"? A.) Stacey has a salary of $145,000 last year and owns 4.5% of her employers stock. B.) Jen had a salary of $115,000 last year and owns 7.5% of her employers stock C.) Time has salary of $147,500 last year and owns 3% of his employers stock

B

Which of the following is not a common feature of a 401(k)? A.) Participants can defer a percentage of their salary. B.) Employees have now way to access their savings until their official retirement age arrives C.) Employers can also contribute to the participant's account.

B A 401(k) involves both the participant and the sponsor being able to make contributions. Employees have access to in-service withdrawals (hardship or safe harbor provisions apply) and plan loans as needed (not recommended).

Hardship withdrawals are ___________________________. A.) a subset of the broader safe harbor withdrawal category. B.) the umbrella that covers safe harbor withdrawals as well. C.) only permitted in Profit Sharing Plans.

B Hardship withdrawals are the umbrella that covers safe harbor withdrawals. Put another way, safe harbor withdrawals are a subset of hardship withdrawals. They are permitted in 401(k)s and PSRPs (and a few other plan types).

Which of the following items in a non-employer sponsored plan? A.) 401(k) B.) IRA C.) 403(b)

B IRAs are plans that are independent of an employer

A distinguishing feature of a pension-type plan is that it ________________. A.) has no limitations on investing in employer stock. B.) permits in-service withdrawals. C.) has required annual contributions.

C

The Pension Protection Act of 2006 offers a list of benefits to plan participants. Which of the following items is not among the list? A.) Age discrimination is not permitted B.) DB plan participants need a periodic notice of the plans asset-level relative to their liability-level. C.) Automatic enrollment is not encourage because it violates freedom of choice. D.) DC plan participants need to receive quarterly statements is they direct their own investment decisions.

C

Vesting is _______________. A.) What you do before you get in a kayak. B.) The process of covering all employees. C.) The timing of when you own your employer's contributions.

C

Which of the following is a character trait unique to a Defined Benefit Plan? A.) Each employee has an individual account which is highly portable to another employee should the participant change jobs. B.) Costs are known, in advance. C.) They can account for past service.

C

Which of the following is not a way in which a SEP similar to a Profit Sharing Plan? A.) Both offer flexible contributions B.) Both can hold mutual funds C.) Both cover part-time employees

C

Which plan type does not allow for employer matching contributions? A.) SIMPLE B.) 401(k) C.) SEP D.) SIMPLE 401(k)

C

Which statement below is most accurate for non-recognition of gains? A.) Non-recognition of gains is only available for NHCEs. B.) Non-recognition of gains works best when paired with a Profit Sharing Plan. C.) Non-recognition of gains occurs when a departing owner in an ESOP uses the cash out proceeds to purchase another publicly-traded stock (or a series of publicly-traded stocks).

C

In a cash-balance plan, participants are credited with _______________. A.) the actual rate of return. B.) the return on a 10-year Treasury plus 4%. C.) a promised rate of return, not the actual rate of return.

C Cash-balance plans provide participants with a certain promised rate of return and not the actual investment return earned. The benchmark for the promised rate is determined by an actuary and not a set formula.

The average NHCE participant at Barkley Industries defers 8.25% of their salary into their 401(k). What is the maximum percentage that an HCE can contribute? A.) 8.25% B.) 10.25% C.) 10.31%

C Following the ADP 1.25 test, the HCEs at Barkley Industries can defer up to 10.31% (8.25% x 1.25 = 10.3125%)

A ESOP is a great tool for the departing owner in a partnership because it enables non-recognition of gains. True False

False

Once someone has reached 30 years of service, there is no pension-linked reason to continue working if the unit benefit formula in place has a 30-year service cap. True False

False

The eligibility rule for 403(b) is that a full-time employees willing to defer at least $2,000 annually must be eligible to make salary deferrals True False

False

A 403(b) plan cannot be designed to permit participant loans True False

False A 403(b) can be designed to permit plan loans

A SEP is a qualified retirement plan. True False

False A SEP account is considered to be in the other category. It is funded with an IRA.

An employer can sponsor both a SIMPLE and a money-purchase pension plan True False

False A SIMPLE plan is the only plan type whereby the employer cannot offer any other plan type in conjunction with their SIMPLE plan

A cash-balance plan is a retired defined-contribution plan with actual accounts for each participant. True False

False A cash-balance plan is a retired defined benefit plan that uses book-entry accounts with no actual dollar funding.

Candidates for a defined-benefit plan typically have the objective of instituting a plan that has predictible costs True False

False A defined benefit plan has extremely unpredictable cost

Target benefit plans have increased in popularity for the last several years because they involve employee payroll deductions and all investment risk is borne by the employer. True False

False A target-benefit plan is not very mainstream because there are so many other plan types that are a more natural fit for most situations. They do not involve employee payroll deductions an all investment risk is borne by the participants.

The Pension Protection Act of 2006 requires that every employer offers their own stock within their 401(k) plan. True False

False Actually, the PPA of 2006 requires that employers offer alternative investments if they offer employer stock within a retirement plan.

An Advanced Determination Letter (ADL) is required for all plans installed since August 17, 2006. True False

False August 17, 2006 is an important date, but this is when the PPA of 2006 was enacted. The IRS was given overwatch with ERISA from 1974. Either way, the ADL is a strictly voluntary process, but it is HIGHLY recommended to avoid potential pitfalls.

A candidate that has a large number of part-time employees should choose a SEP becasue it can be designed to exclude part-time employees True False

False Both SEPs and SIMPLEs include most part-time employees. This is a quasi non-discrimination feature since small businesses will sometimes use part-time employees instead of simply rank-and-file.

Plan sponsors must have current or accumulated profits in order to make contributions to a profit-sharing plan. True False

False Profits are great, but they are not required to make a contribution to a profit sharing plan.

Everyone who receives any form of compensation from a qualified non-profit organization are considered eligible employees for purpose of making contributions to the organizations 403(b) plan True False

False Sub-contractors are eligible to be included in a 403(b) plan

Tax-advantaged retirement plan funds must be invested in tax-sheltered investments, such as life insurance or municipal bonds, in order to avoid current taxation. True False

False Tax-advantaged retirement plans are tax-sheltered by their very nature. Using a tax-free asset within the construct of a tax-advantaged plan would yield no additional benefit and may yield a disadvantage if the tax-free assets returns less than its alternative investments.

Under a target-benefit plan, the employer guarantees that the employee's benefit will be the target amount or greater. True False

False There is no guarantee of the end result with a target benefit plan. The plan's sponsor uses an actuary to attempt to hit a certain target, but the actual investment performance will determine if the mark is hit or even exceeded.

An employer must notify the PBGC before terminating a defined-benefit plan that is covered by the PBGC insurance program. True False

True

Candidates for a defined-benefit plan indicate that the desire to provide an adequate standard of living in retirement outweighs the need to have an easily communicated and administratively simple plan. True False

True

Every plan has at least one named fiduciary who is responsible and accountable for operating the plan. True False

True

One of the major objectives of ERISA was to improve benefit security by requiring plans to disclose more information to participants about their benefits and their rights under ERISA. True False

True

Profit-sharing plans can be designed to allow employees to withdraw funds from participant accounts as early as 2 years after they were contributed by the employer assuming that the employee has worked for the employer for at least 5 years. True False

True

The higher the employee's tax bracket, the greater the tax savings by using a tax-advantaged retirement plan. True False

True

In a money-purchase plan, annual contributions are required and are based on the plan's stated contribution % True False

True A required contribution is a hallmark of a money purchase pension plan

Retirement plans play a key role in making a company competitive in the marketplace because they help the employer to attract and retain employees. True False

True Attraction and retention are two of the major benefits of offering a tax-advantaged retirement plan for employees.

A SEP cannot contain loan provision True False

True Because a SEP is funded with an IRA, it cannot offer a loan provision

The DOL can sue fiduciaries and require restitution to the plan for any losses. True False

True Fiduciaries are personally liable for breaches of their duty.

Employee salary deferral contributions to a 401(k) plan are always 100 percent immediately vested. True False

True The employee's salary deferral is always 100 percent immediately vested. It is the employer's contributions that follow a certain vesting schedule.

Title IV of ERISA created a safety net for employees in the event that the employer goes bankrupt while a pension plan is in place. True False

True Title IV of ERISA created the Pension Benefit Guarantee Corporation (PBGC), which creates a safety net for employees if their employer goes bankrupt while a define benefit plan is in place.

A plan sponsor who makes a safe-harbor contributions to a 401(k) plan is exempt from ADP testing as long as they maintain the safe harbor program. True False

True a tremendous potential benefit to the plan's administrative cost structure.