Competency 13 Section 1 Flashcards
- In most defined-benefit plans, the amount paid in the form of a qualified joint and survivor annuity is actuarially equivalent to the standard form of payment, which is a life annuity
True. (LO 13-1-1) 13.2 1c c. The joint-and-survivor form of payment is the actuarial equivalent of the standard form of payment
- Very few defined-benefit plans offer a lump sum option, and if they do most participants elect an annuity form of payment
False. Most defined-benefit plans today offer lump sum options,
and when a lump sum is available
most participants elect this form of payment. (LO 13-1-1) 13.2 1e
- As long as the participant’s accrued benefit does not change, the value of the lump sum equivalent will not change over time.
False.
To satisfy Code Sec. 417 when market interest rates change, the lump sum value will generally change as well. (LO 13-1-1) 13.2 1g (1) (2) f. The lump sum is based on the actuarial factors stated in the plan but note that Code Sec. 417 provides overriding interest rates for determining the minimum lump-sum value. g. Lump-sum amounts change as interest rates change over time. (1) Lower interest rates result in higher lump-sum values. (2) Higher interest rates result in lower lump-sum values
- A defined-benefit plan sponsored by a large employer is more likely to offer a subsidized early retirement provision than a small employer.
True. (LO 13-1-1) 13.2 j (1)(2)(3) j. Early retirement provisions (1) Typically, with smaller plans there is an actuarial reduction for a longer payment period. (2) Larger employers will often subsidize early retirement benefits. (3) Eligibility for early retirement may require both an age and service provision
- Even though a cash balance plan is technically a defined-benefit plan, the benefit structure looks more like a defined-contribution plan.
True. (LO 13-1-1) 13.3 2 a. b. 2. Cash balance arrangements a. These operate under law as defined-benefit plans—subject to all the same rules. b.
From the participant’s perspective it looks like a defined-contribution plan as the benefit is stated as an account balance
- A participant in a defined-contribution plan may choose to elect an annuity form of payment directly from the plan because of institutional pricing that may be available.
True. (LO 13-1-1) 13.3 b. b. May see better annuity pricing inside the plan because of institutional pricing
- Benefits accrue more evenly over time in a defined-benefit plan than in a defined-contribution plan.
False. Because the defined-benefit formula multiplies years of service by final average salary, increases in both salary and service supercharge the participant’s benefit at the end of his or her career. A defined-contribution has a more even accrual as contributions each year are tied to that year’s salary only.(LO 13-1-1) 13.4 b.(1)(2)
- A defined-benefit participant who changes jobs at age 60 going to a company with a defined-contribution plan is likely to have lower total benefits than if he or she stayed with the original employer.
True. (LO 13-1-1) 13.4 b.(1)(2) b. What benefits can be lost with a late career change? (1) Since fewer employers today have defined-benefit plans, changing jobs a few years from retirement could really have a negative effect on an individual’s benefits if the individual goes from an employer with a defined-benefit plan to one with a defined-contribution plan. (2) The employee loses those last few supercharged years in the defined-benefit plan and moves to a plan that has contributions that are more ratable
A plan that bases average compensation as the three highest years of compensation in the final five years of employment may cause concern for the older worker looking to reduce hours in exchange for lower pay.
True. (LO 13-1-1) 13.4 e. (3) (a)(b) (3) Sometimes average compensation is limited to the final years of employment. (a) For example, the average of the final 5 years of compensation or the highest 3 out of the final 5 years of average compensation. (b) This can be a problem for the older worker who wants to cut back on hours or take on a job with less stress or fewer responsibilities
10.A married participant in a defined-benefit plan that elects a lump sum distribution instead of a joint and survivor annuity will need a plan to ensure that a surviving spouse has sufficient income
True. (LO 13-1-1) 13.5 i (1) thru (5)i. Should a participant’s spouse waive his/her rights to the qualified joint-and-survivor annuity? (1) Qualified retirement plans are required to pay out benefits to married participants in the form of a qualified joint-and-survivor annuity unless both the participant and the spouse waive this form of benefit. (2) The plan must give the participant and spouse a required notice explaining this rule. (3) Part of the distribution option decision making involves this issue 4) Since most elect a lump sum, these rights are routinely waived—but it’s not clear that couples understand the implications of this decision. (5) Planning Point: Explaining the rules to clients is an opportunity to discuss two critical retirement income issues—the role of guaranteed income and the importance of planning for income for a joint lifetime.
11.The best way to increase benefits in a defined-contribution plan is to increase wages in the final year of participation.
False. Since this only affects the current year’s contribution it will not have that much impact on the final benefit. In an account plan, investment experience is the most important factor in the value of a late-career participant. (LO 13-1-1) 13.7 e. (1) e. What factors have the most impact on increasing benefits near retirement? (1) With account plans, investment experience has the single most important impact on benefits late in one’s career, when account balances are at their highest
Defined Contribution = Year by Year Contribution
13.Because of perceived abuses, the IRS and Department of Labor are looking for ways to eliminate annuity options in defined-contribution plans.
False. Both the IRS and the DOL have been studying lifetime income options and a recent regulatory package makes it easier to offer lifetime income options in defined-contribution plans. (LO 13-1-2)
12.Cash balance benefits are more predictable than a defined-contribution plan.
True. (LO 13-1-1)
14.Recent proposed regulations give defined-benefit plans guidance on how to allow participants to partially annuitize their benefit.
True. (LO 13-1-2) 13.8 6.b.(5)
15.IRS guidance clarifies that employees can use 401(k) savings to purchase deferred annuities and still satisfy the spousal protection rules that apply to qualified plans with minimal administrative burdens.
True. (LO 13-1-2) 13.9 2.c.(2)
