3 - Retirement Plan Design

Question 1

Specific objectives that the employer could have concerning the cost of a retirement plan include: (4)

Answer 1

1. contribution flexibility
2. willingness to assume the costs associated with future inflation
3. need for a cost-efficient retirement program
4. desire to maximize benefits and contributions within the limits permitted by federal tax law.

Question 2

A _________approach, though, might suggest the use of a defined contribution plan as the basic program for providing retirement benefits. Here the emphasis is on deferred compensation and the potential for asset accumulation.

Answer 2

compensation-oriented

Question 3

An efficient retirement plan design requires the identification of all sources of benefits for a retired employee. What plans should be considered as a potential source of benefits? (4)

Answer 3

1. employer’s retirement plan
2. social security
3. 401k
4. group life and medical

Question 4

The employer’s attitude on who should bear investment and inflation risks—the employer or the employees—can play a significant role in the choice between these.

In a ______, all risk assumed by employer

In a ______, emplyee assumes all risk

Answer 4

defined benefit

defined contribution

Question 5

Typically, employers set income-replacement objectives with several factors in mind: (4)

• usually take the employee’s (but not the spouse’s) ________ into account.
• objectives usually are _____ for lower paid employees than for higher paid employees.
• objectives usually are set for the employee’s pay level during ___________
• Full income-replacement objectives are set only for individuals who have completed what the employer considers to be a _______ of employment.

(important)

Answer 5

• Social Security benefits
• higher
• the final year of employment
• “career”

Question 6

many employers believe employees should share in the cost of meeting their own economic security needs. this type of employee involvement in a private retirement plan may take two alternative forms

Answer 6

• direct employee contributions
• indirect ways

Question 7

If an employer wishes to achieve maximum tax advantages for a retirement program, this can find expression in many ways, such as: (6)

• benefit ______
• degree of integration with ________
• level of _______ needed
• funding ______ chosen
• ______of both a defined benefit and a defined contribution plan
• use of a ______ plan

(important)

Answer 7

1. formulas
2. Social Security benefits
3. funding
4. instrument
5. adoption
6. target benefit

Question 8

A high degree of concern on the part of an employer about the need for maintaining controls over future cost levels might lead to the selection of a _______ or a _________ retirement plan.

Answer 8

• career-pay
• defined contribution

Question 9

An _____ approach could suggest the choice of a defined benefit pension plan integrated to the maximum extent with Social Security benefits or the choice of a death benefit that provides an income benefit but only to survivors of the employee’s immediate family. Here the emphasis is on protection and continuation of a certain income level when active employment ceases.

Answer 9

income-maintenance

Question 10

Why might it be advantageous for an employer to provide a retirement program for executives that differs from that provided for its employees in general?

Answer 10

it may be difficult for a firm to recruit a needed executive in midcareer because of the loss of pension benefits he or she would experience

Question 11

many employers believe the presence of an adequate benefit program is not a ____ influence in their efforts to attract and retain employees—at least to any significant extent. Rather, these employers reason the absence of such a program could have a ______ effect on their recruiting and retention efforts.

Answer 11

positive

negative

Question 12

Many employers have a preference for measuring their plans against industry standards. However, measuring against industry standards is most appropriate for ______ and for _________—those whose capabilities are more related to the employer’s own industry.

Answer 12

skilled or professional workers

management staff

Question 13

A great many employers believe that, because of the very nature of Social Security bene ts and their relatively larger value for lower paid employees, it would be impossible to achieve an equitable balancing of benefits and costs for employees at all pay levels without integrating _____and _______ in some fashion with the benefits provided by Social Security.

Answer 13

retirement and disability income plans

Question 14

The three techniques that may be used to establish the relative standing of various retirement plans are:

• Compare the benefits _______ to representative employees under different circumstances under the various plans.
• Compare ______ to the employer for the different retirement plans.
• Measure plans on a basis that uses __________ and assumptions and focuses on the relative value of the different bene ts provided.

Answer 14

• actually payable
• actual costs
• uniform actuarial methods

Question 15

Environmental factors that should be taken into consideration in the retirement plan design process include (6):

• The employer’s _____ status.
• The basic ______ of the employer and its industry
• The characteristics of the ______ employed by the employer
• Employers with ______
• The size of the _______ in which the employer does business
• The presence of _________

Answer 15

• legal
• characteristics
• individuals
• diversified operations
• community
• collective bargaining units

Question 16

Income-replacement objectives may be established at levels below 100% of final preretirement pay for the following reasons: (because there are (4) things…)

• Some of the employee’s total retirement income consists of _________
• An employee’s ________, including equity in a home, can also be a source of retirement income.
• The employer may maintain a supplemental _____ or ______ plan that can be a source of additional income.
• Some reduction in gross income can take place without causing a significant reduction in a retiree’s _______.

Answer 16

• Social Security benefits.
• personal savings
• profit-sharing
• 401(k)
• standard of living

Question 17

At one time, it was not uncommon for an employer to have a _____ income- replacement objective for employees at all pay levels. However, it was soon recognized that lower income employees need a higher level of income replacement simply because of _____ income needs. moreover, it was reasoned that higher paid employees could accept lower income amounts without incurring a major _____ in living standards.

Answer 17

single

minimum

reduction

Question 18

Employer attitudes toward providing retirement benefits may vary in philosophy and approach. The following illustrate different employer approaches that can affect basic retirement plan design (2)

Answer 18

• An income-maintenance approach
• A compensation-oriented approach

Question 19

The following examples give some indication of areas in which compliance choices (legal requirements) are available to employers sponsoring retirement plans. (4)

1. ADEA prevents discrimination in employment for employees aged _______
2. Employers may include all employees in their plans or _____
3. An employer may wish to establish a defined benefit pension plan for executives as part of the compensation, but may not want to include _______ or _______ paid to other employees
4. SEC requires a plan which invests in employer securities must be registered can be avoided if employer securities are _________

(important)

Answer 19

• 40 and over.
• exclude the maximum number possible.
• overtime pay and shift differentials
• purchased only with employer contributions.

Question 20

It is logical to assume an employee’s aggregate tax payment often will decrease after retirement for the following reasons: (4)

(important)

Answer 20

1. Retired employee is no longer paying a Social Security tax unless he or she is in receipt of earned income.
2. Social Security benefits are income tax-free
3. standard deduction for federal taxes is increased for individuals aged 65 or over.
4. Retirement income is not subject to state or local taxes in many jurisdictions.

Question 21

Here an employer would offer a liberal benefit program with direct cash compensation that is not fully competitive. Often is found in governmental employers since cash compensation is sometimes capped by law.

Answer 21

reverse compensation strategy mix

Question 22

Profit-sharing plans and plans that involve ownership of _______ are plans that can create employee incentives and, as a result, improve _____.

Answer 22

• employer securities
• productivity

Question 23

Profit-sharing plans, 401(k) plans with some employer stock and employee stock ownership plans (ESOPs) can achieve the objective of ________ by having employees acquire an ownership interest in the firm. If all or part of an employee’s account is invested in employer securities, the employee is made aware of progress
of the company and the importance of achieving satisfactory profit results.

Answer 23

corporate identification

Question 24

Should benefit plan administration should be considered as an employer objective when establishing a retirement plan?

Answer 24

YES - particularly if admin costs can be minimized.

Question 25

plan that meets the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and is thus eligible for favorable tax treatment.

These plans offer several tax benefits:

• they allow employers to deduct annual allowable contributions for each participant
• contributions and earnings on those contributions are tax-deferred until withdrawn for each participant

(important)

Answer 25

qualified retirement plan