Chapter 18 Final

Question 1

Pension Funds

Answer 1

Offer savings plans wehre employees accumulate savings during their career before withdrawing them in retirement

Question 2

When were pension fund first established in the U.S

Answer 2

In 1759 to benefit the widows and children of church ministers

Question 3

When was the first corporate pension fund established

Answer 3

In 1875 by American Express Company

Question 4

How does taxes work on a pension fund

Answer 4

-when working and putting money into your pension money isn’t taxed right away so you can keep more of paycheck
- when you retire and take out from pension then you pay taxes like its regular income

Question 5

How many pension funds exist

Answer 5

Over 740,000 (total assets=31.88 trillion)

Question 6

How did financial crisis affect pension funds

Answer 6

It decreased value of pension fund assets from 25 to 20 trillion
-retirement accounts also fell by over 2 trillion causing people to postpone retirement, take second job,etc

Question 7

what are two sectors of pension funds

Answer 7

Private and public pension funds

Question 8

Private pension funds

Answer 8

Funds are administered by private corporations(insurance companies or mutual funds)

Question 9

Public Pension funds

Answer 9

Funds are administered by a federal, state, or local government (social security)

Question 10

Pension Plan

Answer 10

Document governing operations of a pension fund

Question 11

Defined benefit pension fund

Answer 11

employer provides the employee a specific cash benefit upon retirement

Question 12

Flat benefit formula

Answer 12

Pays a flat amount for every year of employment

Question 13

Career average formula

Answer 13

Pays benefits based on the employees average salary over the entire period of employment

Question 14

Final Pay formula

Answer 14

pays benefits based on a percentage of the average salary during a specified number of years at the end of the employees career times the number of years of service

Question 15

Under defined benefit plans the employer should

Answer 15

ensure that it has sufficient funds to meet the promised payments

Question 16

Fully funded pension plans have

Answer 16

sufficient funds available to meet all future payment obligations

Question 17

Underfunded pension funds

Answer 17

do not have sufficient funds available to meet all future promised payments

Question 18

Overfunded pension funds

Answer 18

have more than enough funds available to meet the required future payouts

Question 19

Defined contribution pension fund

Answer 19

A fund where the employer promises to contribute a specified amount to the pension fund during the employee’s career.

Question 20

Insured pension funds

Answer 20

-are administered by a life insurance company
- pooled and invested in the general assets of the insurance company

Question 21

Noninsured pension funds

Answer 21

-are administered by a financial institution other than a life insurance company
- assets managed are owned by the sponser and listed as separate pools of assets on balance sheet
- Sponser normally specifies guidelines mutual fund should follow but mutual fund still controls day to day investment decisions

Question 22

Private pension funds are created by

Answer 22

Private entities ( corporation or trade union)

Question 23

Defined contribution funds are dominating the private pension fund market because

Answer 23

they are less risky for plan sponsers

Question 24

In 1990 number of defined benefit pension plans decreased from what to what

Answer 24

They decreased from more than 100,000 in 1990 to fewer that 50,000 in 2020

Question 25

As of 2020 how many private pension plans are defined contribution plans

Answer 25

More than 90%

Question 26

401k and 403(b) plans are

Answer 26

Employer sponsored plans that supplement a firms basic retirement plan

Question 27

Whats the difference between 401k and 403(b) plans

Answer 27

-401k plans are offered to employees of taxable firms -403(b) plans are offered to employees of certain tax exempt employers( charities, government agencies, universities, religious institutions)

Question 28

Individual retirement accounts (IRAs)

Answer 28

-Are self directed retirement accounts set up by any individuals -contributions are made strictly by the individual -created as tax deferred retirement accounts to supplement an employer sponsored plan - max contribution from 2025 was 7,000

Question 29

When are Roth IRAs taxed

Answer 29

Contributions for roth IRAs are to be taxed in the year of contribution, and withdrawls are tax free

Question 30

Explain roth IRA features

Answer 30

-contributions must be invested for at least 5 years before withdrawl and account holder must be at least 59 and1/2 years old. -Allow for a max of 7,000 after tax contribution per individual (14,000 per household) - Only available to individuals or households with an adjusted gross income of less than 161,000 or less than 240,000 respectively

Question 31

Public pension funds are

Answer 31

sponsored by the federal or state and local governments - employees may contribute to pension funds sponsored by these employers -most funded on a "pay as you go" basis - due to an increasing number of retirees relative to workers, some pension funds are underfunded

Question 32

Federal government sponser which two types of pension funds

Answer 32

Public pension funds- for federal gov employees, including civil service employees, military personnel, and railroad employees Social Security- provides retirement benefits to almost all employees and self employed individuals in the U.S

Question 33

Employee Retirement Income Security Act ( ERISA) of 1974

Answer 33

-regulation governing private pension funds -established guidelines for funding and set penalties for fund differences

Question 34

Vested employee

Answer 34

Eligible to receive pension benefits because he or she has worked for a stated period of time - ERISA requires that a plan have a minimum vesting requirement and sets a maximum vesting period of 10 years

Question 35

A pension plan fiduciary is

Answer 35

A trustee or investment advisor charged with management of the pension fund -ERISA required than pension fund contributions be invested with sam skill and care as a "prudent person"

Question 36

Fund assets are required to

Answer 36

be managed with the sole objective of providing the promised benefits to participants

Question 37

Give some info on ERISA

Answer 37

-ERISA allows employees to transfer pension credits from one employer to another when switching jobs - established the pension benefit guaranty corporation ( PBGC) an insurance fund for pension fund participants similar to the FDIC

Question 38

Give some info on PBGC

Answer 38

-insures participants of defined benefit funds if the proceeds from the fund are unable to meet its promised pension obligations - nearly 1 million participants receive benefit payments of over 6.5 billion per year from PBGC - Has generally operated at a deficit since its inception

Question 39

Pension Protection Act of 2006

Answer 39

called for increasing the annual premiums paid by companies to 30 per worker from 19 and the imposition of automatic increases in premiums each year