Chapter 4 - Pension Plans

Question 1

DB pension plans

Answer 1

defined benefit pension plan
cash balance plan

Question 2

DC pension plan

Answer 2

Money purchase plan
Target benefit pension plan

Question 3

ERISA Mandatory funding requirement

Answer 3

plan must be fully funded at 100% of PV of benefits every year

Question 4

Mandatory funding for DB plans

Answer 4

plan sponsor must fund the plan on an annual basis with an amount determined by actuaries

Question 5

Mandatory funding for DC plans is based on

Answer 5

the plan document

Question 6

In-service withdraws (applies to DB and DC)

Answer 6

any withdraw while an EE is still a participant in the plan

Question 7

2006 Pension Protection Act

Answer 7

allowed for in service withdraws fter the age of 62

Question 8

SECURE act

Answer 8

reduced the age of allowable in service withdraws to 59 and 1/2

Question 9

Limited investment in ER securites

Answer 9

No more than 10% of investment can be in ER securities. This protects the ability of the plan to pay promised benefits

Question 10

Required for spousal coverage

Answer 10

options are available to cover a spouse but not mandatory

Question 11

Limits on life Insurance

Answer 11

No more than 25% of the plan can be funded by life insurance. Life insurance is not the primary focus of the plan

Question 12

Differences in DB and DC plans (6)

Answer 12

1. use of an actuary
2. investment risk
3. pension benefit guarantee corporation
4. benefits
5. credit for prior service
6. permitted disparity/social security integration

Question 13

Difference in use of actuary

Answer 13

DC plan does not need an actuary and DB plan does need one to estimate owed debt at the end of the plan year

Question 14

Actuaries set expectations based on ____ (6) and the price is correlated how with each

Answer 14

expected inflation (positive)
wage increases (positive)
life expectancy (positive)
investment returns (negative)
mortality (negative)
forfeiture turnover (negative)

Question 15

Differences in Investment risk

Answer 15

In a DB plan ER bears the investment risk and in a DC plan the EE bears the investment risk

Question 16

Differences in Pension Benefit Guarantee Corporation (PBGC)

Answer 16

only covers DB Plans not DC Plans. It is a federal program that insures DB plans.

Question 17

How does the PBGC work?

Answer 17

premiums are paid for by firms offering pensions
the max benefit is $6,204.55

Question 18

Difference in Benefits (calculation of accrued benefits)

Answer 18

DB plan = PV of expected vested future payments
DC plan = vested acct balance of a qualified plan

Question 19

What is accrued benefit

Answer 19

way to calculate the total benefits an EE has earned over their employment

Question 20

What is the formula to calculate DB pension plan benefits

Answer 20

percentage (usually low) x yrs of service x final earnings

Question 21

Difference in credit for prior service

Answer 21

only available for DB plans not DC plans.
Is when an ER can give a new EE credit for prior service if they had a DB plan with past ER and lost some of those benefits

Question 22

definition permitted disparity/social security integration

Answer 22

helps offset social security’s discriminatory nature towards lower income EEs

Question 23

Difference in permitted disparity/social security integration

Answer 23

DB can use excess and offset method while DC can only use excess method

Question 24

Excess Method

Answer 24

the goal is to increase benefits EEs with compensation > covered comp limit.

this is limited to the lesser of .75 of years of service OR the benefit % for earnings below the covered compensation limit per yr of service

Question 25

Offset method

Answer 25

the goal is to reduce pension benefits for lower-compensated EEs.

limited to the lesser of 1.75% per year of compensation or -.75%

Question 26

1. Traditional DB pension plan characteristics

Answer 26

1. mandatory funding based ona ctuarial analysis
2. 3 ways to calculate benefit (flat amount, flat % formula, Unit credit formula)
3. commingled accounts
4. favors older EEs/ Longer term EEs

Question 27

flat amount calculation of benefits

Answer 27

every EE recieves the same benefit regardless of income

Question 28

flat percentage formula calculation of benefits

Answer 28

takes a specified % of annual compensation

Question 29

unit credit formula calculation of benefits

Answer 29

yrs of service x a percentage x total final compensation

total final compensation can be (avg income of last 3 yrs or highest of last 3 yrs income)

Question 30

Commingled accounts

Answer 30

ER operates the fund and account. EE has no liability or responsibility

Question 31

2. Defined Benefit Cash Balance Plan Characteristics

Answer 31

1. mandatory funding
2. based on annual guaranteed contribution rate + guaranteed earnings on the contribution
3. vesting is ALWAYS 3yr cliff
4. a traditional plan can be converted to the cash balance
5. two parts to plan: pay credit and interest credit

Question 32

Defined contribution Money Purchase Plan Characteristics

Answer 32

1. mandatory annual funding of a fixed % of EE compensation limited to 25%
2. participant bears the investment risk
3. EE has separate accts from ER
4. favors younger participants bc they can ride out volatility
5. do not require actuarial analysis (no minimum funding needed)

Question 33

Defined Contribution Target Benefits Plan Characteristics

Answer 33

1. type of money purchase plan
2. contribution based on EE age
3. goal is to provide traditional benefits
4. EE bears the investment risk
5. favors older EEs