Assignment 6 - Defined Benefit Overview 1 Flashcards
A DB plan that is integrated w/ SS through a formula that subtracts some amount from the gross plan benef. based on the SS benefit.
- focus on total benef. from plan and from SS
- start w/ calc. of benef. from plan, then reduce plan by as assumpt. of SS benef. up to 50%
- calc. is NOT based on real SS benef amt
- Max. YoS that can be included in calc. = 35
offset plan
The point at which EEs would receive full benefits from a DB plan - no later than age 65 or the 5th yr of partic. in plan
- 65 is most common
- ERISA limit = later of age 65 or 5 years of plan partic.
- could be younger age
normal retirement age
- type of plan that bases benef. on earnings avg’d over an EE’s entire career
- give EE same benef. if EE moves around from copmany to company each having the same type of plan
- no reflection of inflation
- ER will update formulas to reflect inflation
- EE has less confidence in this because of ER control (and not being automatic)
career pay plan
career avg plan
- DB formula that is based on the avg of the final 3 or 5 years of pay
- designed to reflect inflation prior to retirement by only using recent pay
- cost bourne to ER
Final Pay Plan
Final Avg Plan
basic formula provides a flat benef. unrelated to an EE’s earnings or service
- simplest
- same amt to all, regardless of service, age, or earnings - not tied to current pay
- often used w/ another plan
- may require a long length of service to receive this benef.
- usually tied to unions; amt is only incr’d by union agreements
flat amount formula
(for calc. DB benefts)
**DB plan that varies the amts to reflect the inv. results of an underlying fund of common stocks (stock mvmnt should mirror inflation)
**bases benef. on final avg pay adn the %age credits a partic. receives each yr.
- might be variable annuity or tied to stock portf.
- affect only portion of benef.
- cost controlled by ER
- risk shifted to EE
- complicated
- mvmnts don’t always mirror inflation
equity pension plan
Advantages for EE Contrib to DB plans
- EEs are responsible for their retirement
- Smaller ER contrib. are needed for same benef.
- Same ER contrib. would give greater benef.
- avoids somethign for nothing
- encourages saving
Disadv. of EE Contribs.
- AT dollars from EE = dollar for dollar get less benef. than w/ ER funds
- ER may need to raise salaries so EEs can afford to contrib.
- Partic. issues
- plan qualif.
- EEs being able to retire
- recordkeeping
- reduced benef. (usually)
- full benefit if: Combo of years and service equal 90; age 55 + 10 years (examples)
- Options in calculating reduction in benef:
- pro-rata
- present value
- set formula
Early Retirement Benefit
Benefit Structures = how much do participants get
2 major factors: Length of service
Salary/earnings (comp)
PROS of Final Average Pay
- ties benef. to standard of living at retirement
- keeps pace w/ pre-retirement inflation
- more favorable results for key EEs
- easier to track
CONS of Final Average Pay
- more expensive
- can’t reduce benefits from highest retirement benefit earned
provides benef. related to EE’s earnings
nonautomatic adjustment for post-retirement inflation
- simple
- set % of pay, regardless of service
- may use career avg or final avg (mostly final avg)
- may require certain amount of service by NRA
- doesn’t reflect YoS
Flat Percentage of Earnings formula
(for calc. DB benefts)
relfects EE’s service but not earnings
nonautomatic adjustment for post-retirement inflation
- simple
- values service over earnings
- $X times years of service
- Requires 1,800 - 2,000 hrs to get full value
Flat Amt per YoS formula
flat dollar
(for calc. DB benefts)
reflects both an EE’s earnings and service
nonautomatic adjustment for post-retirement inflation
- occasionally tied to CPI
- unit cred (or past and future service)
- often 1% or 1/25% of pay per year of service
- can be used with both career avg or final avg (works best with career avg pay plan)
Percentage of earnings per YoS (Unit credit formula)
(for calc. DB benefts)
2 formulas for SS Integration w/ DB plans
- Excess Method
- Offset method
*type of formula used for SS integration
*higher rate on pay above integration level
- focus is on earnings and wage base
- can set excess level at SS wage base or below
- %age rate applid to pay over integration level CAN’T be greater than 0.75% more than base %age
- if base %age is less than 0.75%, excess %age CAN’T be more than twice base %age
Excess Method
Death Benefits for DB plans
- optional
- if Life Ins. is used to fund plan - any easy structure for pmt
- can be cash distrib. from plan assets
- payable before or after retirement
- if vested partic. dies prior to retirement, there has to be a benefit payable to the spouse
- with a death benefit on DB plan
- req’d for all pension plans
- any any of these is added to any other death benef. to dtermine if the total death benef. exceeds 100 x monthly benef.
Qualif’d Preretirement Survivor Annuity (QPSA)
Disability Benefits
w/ DB Plans
- generally self-insured (in some form paid from plan assets)
- made avail. to fully vested partic.
- treat it as early retirement w/ certain level of service
- may integrate w/ SS or worker’s comp benef.
- EE may continue to accumulate pensions credits during LTD
Post-Retirement Inflation
(types of formulas)
- Equity Pension - tied to variable annuity or stk portf.
- Cost of Living formulas - tied to CPI
- Wage-related formulas - tied to designated wage index
- Specified Percentage - set specific %age each year
- Nonautomatic adjmnts - ER controls adjmnts
a formula in a DB plan that provides a different benef. rate for comp below the SS wage base than the comp ove the SS wage base
both DC and DB plans have it
Excess Integration Formula
DB plan formula for integration w/ SS is based on the indiv’s SS benef.
only DB plans have this
Offset Integration Formula
DB formulas
- flat $ amt
- flat %age of pay
- flat amt per YoS
- %age of comp per YoS
(2) types of benefit formulas for retirement programs
- DC or money purch. formula
- DB or annuity purchse formula
- type of benefit formula used for retirement program
- contrib. rates are fixed
- EE’s benef. varies depending upong amt of contrib., inv. earnings on assets, EE’s entry age and retirement age
DC or money purch. formula
- type of benefit formula used for retirement program
- DB is estab’d for each EE
- contribs are determined to be whatever is necessary to produce the DB reuslts
- may be subdivided into different types
DB or annuity purch. formula
purpose of variable benef. plans
protect against the effects of inlation on a retired employees pension benef.
attempts to adjust benef. to keep an EE’s purch’g power level
(2) general forms:
- varies to reflect chgs in value of specific portf. of common stks and similar inv.
- varies to reflect chgs in a recognized cost-of-living index (exp. Burear of Labor Stats)
