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)
