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RPA 4 > Assignment 4 - Retirement Planning Approaches > Flashcards

Assignment 4 - Retirement Planning Approaches Flashcards

1
Q

IF:

  • DB plan has a PV of the cumulative accrued benefits for the key EEs exceeds 60% of the corresponding value for all EEs
  • In a DC Plan, the aggregate accts for key EEs exceeds 60% of the aggergate accts of all EEs
A

Top Heavy

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2
Q

term for a plan in which SS benef. or contribs are taken into acct in establishing the plan

A

integrated plan

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3
Q

some commentators have referred to this as the “4th” leg of the retirement income stool

A

part time employment (during retirement years)

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4
Q

sources of retirement income

A

“3-legged stool”

  1. indiv. provided retirement income
  2. SS Benefits
  3. ER provided retirement income
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5
Q
  • Analyses of Projected Returns
  • presuppose that future returns will be similar to current returns, w/o any signif. variations
  • expected returns should then be compared w/ projected outlays
A

Straight-line or Average Returns

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6
Q
  • Analyses of Projected Returns
  • uses a PC program to simulate thousands of mkt scenarios and various asset allocation strats. to develop probabilities of success for different inv. and w/drawal combos
A

Monte Carlo or Probabilistic Analysis

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7
Q

guaranteed income that the beneficiary cannot outlive

pmt consists of inv. income and return of capital invested

A

life annuity

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8
Q

investing capital in a fund that is more liquid and able to be used to respond to new inv. opportunities, emergencies or achieve other goals

A

preservation of capital

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9
Q

(3) types of insured status (SS benefs.)

A
  1. fully insured
  2. currently insured
  3. disability insured
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10
Q
  • type of insured status for SS benefs.
  • indiv. has 40 qtrs of coverage
A

fully insured

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11
Q
  • type of insured status for SS benefs.
  • indiv. has 6 qtrs of coverage during the 13 qtrs ending w/ his death, elig. for old-age benefs., or disability
A

currently insured

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12
Q
  • type of insured status for SS benefs.
  • worker is 31 or older when he becomes disabled
  • must be fully insured
  • must have at least 20 qtrs of coverage during the 40 qtr period prior to beginning disability
A

disability insured

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13
Q

Social Security Benefits

A
  • start w/ elig. beginning at age 62 and being fully insured
  • based on worker’s PIA
  • early retirement is at age 62 w/ 75% of benefit paid
  • full benef. at 66
  • increased benef. until max age 70
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14
Q

SS death benefits

A
  • fully insured wkr in the amt of 100% of PIA
  • made payable to spouse that is 60+ or is disabled and age 50+
  • 75% of PIA for surviving child under 18, under 19 and a student, or 18 or older if disabled prior to 22
  • surviving spouse elig. for mother/father survivor’s benef. equal to 75% PIA as long as caring for dependent child under 16 or older and disabled
  • dependent parent that is age 62+
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15
Q

SS disability income benefits

A
  • cash disability income
  • freezing of disable worker’s wage position
  • 5-month elim. period
  • fully insured wkr; w/ disability ruling
  • any occupation rule and is expected to last for at least 12 months or death if it has already been 12 months
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16
Q

ADV’s of qualified plans

A
  • ER contribs - deductible for income tax purposes by ER
  • EE’s - no taxable income until benefits are distributed
  • Inv. income gains - not taxed until paid out
  • EE’s pre-taxed contribs through slry deferrals
  • lump sum distrib. - favorable income tax treatment
  • ER may pay full cost or part of cost of plan
  • possible loan provisions from plan
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17
Q

preretirement protection for spouse’s benefit

a life annuity for the surviving spouse of a plan partic. who had a vested benef. in the plan and who dies before his/her benef. are to begin

A

qualifed preretirement survivor annuity (QPSA)

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18
Q

postretirement protection for spouse’s benefit

an annuity for the lifetime of the partic., w/ a survivorship annuity for the lifetime of his or her surviving spouse of not less than 50% or more than 100% of the annuity payable during their joint lives

A

Qualified Joint and Survivor Annuity (QJSA)

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19
Q

recognizes the rights of alternate parties to all or part of partic. of benefs. under a qualified retirement plan.

for example: under equitable distrib. of prop. laws, retirement plan rights often are considered marital prop. and thus are subj. to equitable division b/w the spouses upon separation or divorce

A

Qualifed Domestic Relations Order (QDRO)

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20
Q

Section 415 Contribution Limits

A

may not exceed the smaller of:

  • DB: ER’s may not exceed $200,000 OR 100% of partic. avg ann. comp for highest 3 consec. yrs of comp.
  • DC: may not exceed the lesser of $50,000 or 100% of partic’s annual comp.
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21
Q

Sect. 415 ER tax ded. limits on contrib.

A
  • DB: annual ded. limit is the amt needed to fund the plan which may be deducted; may deduct UP to full funding limit (not more than full funding limit)
  • DC: 25% of total comp. of partic. unless specified in the plan docs for other plans such as 401K, SIMPLEs, ESOPs, SEPs, target benef. plans, and IRAs
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22
Q

what is the compensation cap limit?

A

2012 - $250,000

23
Q

the non-forfeitable right of the plan partic. to his/her acct balance in a DC or accrued benef. in DB plan.

right exists no matter if the partic. remains with ER

A

Vesting

24
Q

Cliff Vesting

A
  • DB: 100% after 5 YoS
  • DC: 100% after 3 YoS
25
Q
  • this applies to qualified plans, IRAs and charities
  • results from conduct of an unrelated trade or bus. regularly carried on by the exempt trust or org. and from income from debt-finance prop.
A

unrelated bus. taxable income (UBTI)

26
Q
  • type of hybrid plan
  • DB, but structured to look like DC
  • ER contrib. a % of EE’s comp.
  • formula to determine funds needed during to pay out during retirement
  • hypothetical accts are maintained for each partic. for contrib. and interest earned
  • great in benefs to younger and shorter-servcie EEs
  • lower costs to ER than typical DB plan
  • benef. paid by lump sum or periodic pmts
A

cash balance plan

27
Q
  • type of hybrid plan
  • DB plan
  • benef. are expressed as a %age of final avg pay
  • based on points received for each YoS
  • points greater for older and longer service partic.
A

pension equity plans

28
Q
  • type of hybrid plan
  • DC plan
  • ER contribs are based on a target benefit formula
  • directed to actual indiv. accts for partic. to be paid out at retirement
A

target benef. plan

29
Q
  • type of hybrid plan
  • includes both a DC and a DB plan
  • EE receives the larger benef. of the 2 at retirement
  • benef. produced by the DB plan are reduced by a partic’s balance in the DC plan
  • if the DC plan fails, the DB plan provides a minimum benef.
A

floor offset plan

30
Q
  • retirement plans for self-employed
  • tax-favored benef.
  • can be DB or DC plans
A

HR-10 or Keogh plans

31
Q

a plan where there is a smaller benef. payable on earnings up to the SS integration level than on earnings above that level

A

excess plans

32
Q

the total amt of benefs that my be paid to a worker and his elig. dependents

based on PIA

A

Family Maximum Benefit (FMB)

33
Q

concept that ER’s sponsoring DB plans must make contribs. to plan in good times and in bad times.

A

funding rigidity

34
Q
  • an officer of the ER w/ annual comp. greater than 50% of the Sect. 415 $ limit for DB plans
  • 5% owner of the ER
  • more than 1% owner of the ER who has annual comp from the ER of more tha $160,000 (2009)
A

key employee

35
Q

plan under which a pension benef. is calculated w/o regard to SS benef. and then a %age of SS benef. is deducted from the pension benef.

A

Offset Plan

36
Q

contrib. on behalf of partic. and the inv. earnings that go into indiv. accts for each partic.

A

participant-directed accts

37
Q

economic problems during retirement years

A
  • assumption that financial needs during retirement yrs are lwer than those of actively working person prior to retirement is probably overstated
  • retirees find themselves in the position of wanting to help their adult children or grandchildren financially
  • effects of inflation and deflation (purchasing power)
  • early retirement will increase the duration of time spent in retirement
  • increasing life expectancy
  • charitable-giving wants
38
Q

SS eligibility requirements for old-age benefits

A
  • must be aged 62 or older
  • have attained “fully insured” status
  • at full-benefit retirement age, the benef. is equal to worker’s PIA
  • if elect this at 62, benefit will be permanently reduced
39
Q
  • this type of retirement plan has benefits expressed as a sepcified, definite benefit at retirement
  • benefit may be $ amt or it may be determined by a formula
  • since benefit is fixed, contrib. vary to fund the policy
A

defined benefit plan

40
Q
  • this type of retirement plan provides for an indiv. acct for each partic. w/ specified or variable contrib. being made to those accts
  • accumulated acct balance for a particpant may be affected by factors such as contrib. to the acct, inv. income, inv. gains/losses from the assets in the acct, and possible forfeitures of other plan partic. that may be allocated to the acct
A

defined contribution plan

41
Q

Retirement Equity Act

A

give a noncov’d spouse certain survivorship rights in the qualified retirement plan benefits of the cov’d spouse, unless those rights are waived by the cov’d spouse w/ the proper witnessed consent in wirting by the noncov’d spouse

42
Q

postretirement protection for spouse’s benefits developed by the PPA

  • an annuity for the life of the partic. w/ a survivor annuity for the life of the spouse that is equal to the applicable %age of the amt of the annuity that is payable during the joint lives of the partic and the spouse

AND

  • the actuarial equivalent to a single annuity for the life of the partic.
A

qualified optional survivor annuity (QOSA)

43
Q

tax law on loans

A
  1. loans may not exceed the smaller of:
  • $50,000 OR
  • 1/2 PV of EE’s vested benef. in the plan
  • loans under $10,000 - not taxable
  1. must be repaid w/in 5 yrs; level pmts made at least qrtly (unless primary residence which then means w/in reasonable time)
  2. reasonable rate of int.
44
Q

loans for qualified retirement plans

A
  • many plans allow this
  • advantage - loans are not considered to be taxable plan distrib. as long as they meet tax law requirements
45
Q

minimum vesting schedules

A

Per older standards:

  • 100% vesting after 5 yrs of service (cliff vesting) OR
  • vesting at a rate of 20% after 3 yrs of service, 40% after 4, 60% after 5, 80% after 6, and 100% after 7 YoS (graded vesting)

after EGTRRA:

  • 100% after 3-YoS (cliff vesting) OR
  • Vesting at a rate of 20% after YoS, 40% after 3, 60% after 4, 80% after 5, and 100% after 6 YoS (graded vesting)
46
Q

regulation that governs the operation of qualified retirement plans such as fid. liability issues, prohibited trans. rules, and rptg/disclosure requirements

A

ERISA

47
Q

fiduciary standards set by ERISA

A
  1. act solely in the int. of the plan partic and benef.
  2. carry out their duties prudently
  3. follow the plan docs so long as they are consistent w/ ERISA
  4. diversify plan inv.
  5. pay only reasonable plan expenses
48
Q
  • this type of retirement plan is a DC plan established by ERs
  • contribs are allocated under a defined predetermeined formula to indiv. accts
  • indiv. accts are credited w/ inv. earnings
  • can be integrated w/ SS
  • may have loan provisions
  • can be comined w/ other plans
  • annual contribs. are usually discretionay w/ the ER; but must be allocated among partic. according to the formula
A

profit-sharing plans

49
Q

types of profit-sharing plans

A
  • regular
  • age-weighted
  • new comparability
50
Q
  • type of profit-sharing plans
  • simply based on allocation formula on partic. compensation (uniform contrib. no matter what other factors may exist)
  • typically favors younger EEs - compounding of inv. returns over a longer duration of time will enhance wealth accumulation
A

regular profit-sharing plan

51
Q
  • type of profit-sharing plans
  • bases its allocation formula on both age and compensation
  • typically favors older partic. w/ higher earnings
A

age-weighted profit-sharing plans

52
Q
  • type of profit sharing plans
  • allocations can vary not only by each partic’s covered comp and age, but also by his or her job classification
A

new comparability profit-sharing plans

53
Q
  • contrib. to these accts are taxed currently as gross income to the EEs
  • tax-free growth of inv. earnings inside acct
  • tax-free distrib. of acct balances to partic. and beneficiaries
  • no income or age limits on who can contrib.
A

ROTH accts (401K and 403b)

54
Q
A

RPA 4 (12 decks)

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