CH 4 - Defined-Benefit, Cash-Balance, Target-Benefit, & Money-Purchase Pension Plans Flashcards
Why is a defined-benefit plan is used?
Provide a stable retirement benefit for employees that reflects a standard of living comparable to that enjoyed prior to retirement.
Identity the following define-benefit formula.
- unit-benefit - ___________
- flat percentage of earnings - ___________
- flat amount per year of service - ___________
- flat benefit - ___________
- unit-benefit = % of final average monthly compensation (FAC) x years of service (30 years x $10,000(FAC) x 1.5% = $4,500)
- flat percentage of earnings = % of FAC
- flat amount per year of service = $$ x per year of service
- flat benefit = $$$ a month
What’s past service?
Prior years of participation
What are the elements of the unit benefit formula? (5)
- definition of compensation (base/bonus/overtime/salary deferrals limited to $270,000)
- final average compensation (highest 3/highest 5/highest 3 of final 5)
- years of service (past service/years of participation)
- form of benefit (life annuity, 10-year-certain and continuous)
- normal retirement age (65 with 5 years of participation)
This type of defined-benefit plan is a promised benefit stated as account balance (eg fictitious account) or a percentage of salary.
For example, the participant’s benefit is stated as a lump sum (not a replacement) which consists of an allocation of 5% of compensation each year plus an investment credit of 4% each year.
cash-balance
Which plans are PBGC insured?
defined benefit plan
cash balance plan
A cash-balance has what type of rate of return?
promised/guaranteed
Which plans are define-_contribution_ plans and which plans are define-_benefit_ plans?
A. define-benefit
B. cash-balance
C. money-purchase
D. target-benefit
A. define-benefit = DB
B. cash-balance = DB
C. money-purchase = DC
D. target-benefit = DC
How are the contributions handled with regards to a money-purchase plan?
An annually stated contribution.
For example, year the company will contribute 6% of compensation for each eligible employee
Why was a money-purchase plan established?
Because it is more secure than discretionary profit-sharing contributions.
A target-benefit plan uses a variation of the _________ with a special contribution formula.
money-purchase plan
With a target-benefit plan the employer will contribute the amount necessary to fund a…
monthly benefit.
Why would a company use a target-benefit plan?
Larger contributions are required so the older employees/owners get more.
