Module 1 Flashcards
(19 cards)
1.1 Basic economic problems facing the aged include:
a) desire to maintain pre-retirement standard of living
b) declining employment opportunities for the aged
c) low savings for aged due to: higher income taxes, increased consumption patters, inflation.
d) improved longevity
1.2 Is the assumption that financial needs of an individual decrease after retirement valid?
Somewhat valid.
No longer have dependent children and home typically paid for.
However, most people don’t change standard of living.
1.3 Different reasons for the withdrawal of the aged from the labor force:
a) older workers want to retire and do so voluntarily
b) physically unable to perform duties
c) industrial and technological advances are disadvantage to older employees
d) OASDI (old age, survivors and disability insurance) tend to institutionalize the age of 65 as normal retirement age
1.4 Explain value of home ownership for the economic security of the aged
Maintenance costs are typically 33-40% less than when renting similar home
Home is an income-producing asset
Can be used as a reverse annuity
2.1 What forces have restricted growth savings in U.S.?
Constantly increasing standard of living leads to less savings
High level of federal income taxes
Inflation
2.2 Why have private retirement plans grown so rapidly in the last century?
a) increased productivity/moral of employee group when offered
b) tax considerations (advantages)
c) post-WW2 establishment of benefit programs (including retirement)
d) union pressure
e) attract and retain talent
f) reward for long period of service
g) group savings approach
h) sales efforts by insurance companies, bank trust depts., corporate trustees, and mutual funds
2.3 What alternatives exist for an employer when the employee can no longer meet the job requirements? (called superannuated)
a) can terminate employee once value drops below salary being paid (rarely taken)
b) keep employee in same position even though they’re less productive. less productivity.
c) Retain less productive worker and transfer worker to less demanding job at reduced level of compensation
d) establish formal retirement plan - allows you to replenish workforce
2.4 Tax advantages of qualified retirement plans:
a) employer contributions = deducted as business expense
b) investment income earned is tax-deferred
c) no current income tax to employee on employer’s contributions to the retirement fund
d) employee may be in lower tax bracket
e) distributions from retirement plans may be taxed on favorable basis (limited circumstances)
3.1 WWII impact on private retirement benefits?
Employee Benefit programs created
3.2 What role did National Labor Relations Board NLRB play in retirement plan development?
Employer cannot install, terminate, or alter the terms of retirement plan covering organized workers without approval of authorized agent for these employee
3.3 Private Retirement Plans as supplement to Social Security benefits and individual savings programs
- lowest cost method of providing economic security for the aged.
-increase consumption levels among the aged
-represent a type of forced savings
3.4 What is meant by business expediency? How does this relate to growth of early retirement plans?
Motivation for creation of plans was economic benefit accrued to the employer
This caused growth of early retirement plans
3.5 Arguments by those opposed to human depreciation concept
-aging is physiological and not attributable to employment relationship
-employer should be held responsible for increase in rate of aging caused by occupational hazards
-analogy between humans/machines is unsound
3.6 Arguments by those opposed to deferred wage concept
Some employers offer retirement plan in addition to a cash wage increase
employer may willing accept a lower profit margin to provide retirement fund
if retirement fund is a wage then terminated employees should be entitled to part of retirement benefit earned before termination
4.1 Major effects of ERISA on design process for private retirement
Development of IRA
Developed new reporting, disclosure, and fiduciary requirements
4.2 TEFRA’s impact on design process for private retirement plans
Reduced maximum limits of retirement plan benefits and contributions
added parity between corporate plans and self employed plans
added restrictions to plans that were unfavorably weighted towards key employees
provided federal income tax withholding on retirement and annuity premiums
4.3 TRA ‘86 impact on design process for private retirement
Most pervasive changes since ERISA
new coverage tests and accelerated vesting requirements
changed integration rules with Social Security
Lowered limits for retirement beginning before 65
changed timing and taxation of plan distributions
Terminated IRA deductions for many qualified plan participants
5.1 Key changes EGTRRA (Economic Growth and Tax Relief Reconciliation Act of 2001) made to retirement plans
a. increased contribution, benefit, and deduction limits for retirement
b. business credits for starting up retirement plans
c. tax credits to lower/middle income employee contributions
d. greater parity among corporate, nonprofit, and govt plans
e. greater contribution limits permitted for retirement plan participants 50 and over
f. allow certain retirement plans to incorporate a feature called a “qualified Roth contribution program”
g. greater portability for all types of retirement programs
5.2 PPA (Pension Protection Act) provisions related to defined contribution plans
a. incentivized to auto enroll employees in defined cont. plans and default to automatic enrollees into balanced long-term investments or managed accounts
b. employer contributions subject to faster vesting
c. financial advisors allowed to give personal investment advice to 401k participants and IRA participants
d. diversification requirements for certain defined contribution plans holding publicly traded stock
