DB Plans Flashcards
What are a few characteristics of a defined benefit pension plan?
-They have mandatory annual contributions.
-The benefit is usually a monthly pension at retirement age.
-It is a responsibility of the ER to fund, not the EE.
-The money is pooled. There is no “account” or investment options like other retirement accounts.
-The PBGC is attached to pensions.
For defined benefit pensions, what is the max benefit it can provide annually?
Lesser of 100% annual salary
OR
$245k (2022)
What effect does retiring early (age 62 or younger) do to a pension?
It can possibly reduce it although there are stipulations that might encourage someone to retire earlier.
What are some of the characteristics of coverage by the PBGC?
Less than 25 EEs in a PSC, does not require coverage by the PBGC
Monthly payments can be significantly less than pensions payments
What are the 3 calculation methods for a defined benefit pension?
Flat amount: a set amount is given for life and does not discriminate the amount of compensation when employed
Flat percentage: usually a percentage of the EEs annual compensation - usually requires a certain time period of work to realize benefit.
Unit benefit: (military) a set percentage earned per year of work. Again usually requires a certain time period of work to realize any benefit.
What is a DB(k) plan?
A traditional defined benefit pension plan with a 401(k) component.
Cannot have more than 500 EEs
The Section 401(k) component must include an automatic enrollment feature and a fully vested 50% match on the first 4% of compensation deferred by an employee.
What are the EE benefits of the DB(k) plan?
-Guaranteed monthly income at retirement from the defined benefit portion of the plan
-Encourages employers without defined benefit plans to establish a plan
-Combines the security EEs get through traditional defined benefit pension plans with individual investment control of the 401(k) portion
-Allows automatic enrollment provisions, which encourage EEs to save more than they may have in a traditional Section 401(k) plan
What are ER benefits of the DB(k) plan?
-Exemption from the top-heavy rules
-Allows small employers to sponsor a defined benefit pension plan with more predictable costs because the Section 401(k) matching contribution is not contingent upon factors such as employee mortality, plan investment returns, and other factors that affect defined benefit pension plan contributions
-Specifications of the defined benefit formula are defined in advance Offers simplified administration and potentially lower costs than having two individual plans
-Requires only one plan document, one trust, one Form 5500 filing, one summary plan description (SPD), and one set of statements
What are the retirement plans that have mandatory funding? In other words, what are all of the pension plans DC or DB? (Be My Cash Target)
B - benefit
M - money purchase
C - cash
T - target
What is a cash balance pension plan?
Annual ER contributions at a specified rate to a hypothetical individual account
All investment decisions are made by a fiduciary employed by the plan.
The plan credits a “guaranteed return” to the account
The interest rate risk is on the ER.
Requires actuary and PBGC.
When is a cash balance pension plan appropriate?
When the workforce is relatively large and young (younger than age 50).
When the employees are primarily middle-income wage earners.
The type of employer that would use the cash balance plan is a midsize or large company that already has a well-funded traditional defined benefit pension plan and is desirous of cost savings with respect to its sponsored retirement plans.
A classic example would be a fire department.
What is a section 412(e)(3) plan pension plan?
This is a retirement plan that is fully funded by cash value life insurance - usually whole life or an annuity.
What are characteristics of the 412(e)(3) pension plan?
No minimum funding requirements (unless a loan is issued to the policyholder)
Premiums are paid by the ER
Growth risk is on the insurance company
No actuary - on the insurance company
What is a money purchase pension plan?
The ER makes annual contribution.s
The investment risk is on the EE.
NOT covered by the PBGC.
Contributions can only come from the ER.
What is a target benefit pension plan?
An actuary is used in the first year to assume where the plan needs to be to provide a set benefit at retirement
The plan is then funded like a cash benefit pension plan
The EE assumes the investment risk.
This plan is NOT covered by the PBGC.
This type of plan favors older (50) and above for bigger payments and younger rank and file EEs for lower payments.
