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Certified Benefits Professional - Retirement Plans > Module 2 Defined Contribution Plans > Flashcards

Module 2 Defined Contribution Plans Flashcards

1
Q

What is the primary purpose of a retirement plan?

A

To provide income to individuals during their retirement years.

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2
Q

True or False: Defined benefit plans guarantee a specific payout at retirement.

A

True

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3
Q

Fill in the blank: A __________ plan allows employees to contribute a portion of their salary to a retirement account.

A

Defined contribution

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4
Q

What is a common feature of 401(k) plans?

A

Employee contributions are often matched by the employer up to a certain percentage.

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5
Q

Multiple choice: Which of the following is NOT a type of retirement plan? A) 401(k), B) IRA, C) HSA, D) Pension

A

C) HSA

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6
Q

What does ‘vesting’ refer to in retirement plans?

A

The process by which an employee earns the right to keep employer contributions to their retirement plan.

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7
Q

True or False: Participants in a defined contribution plan bear the investment risk.

A

True

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8
Q

What is the typical age for penalty-free withdrawals from retirement accounts?

A

59½ years old

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9
Q

Fill in the blank: The __________ is the maximum annual contribution limit for a 401(k) plan.

A

contribution limit

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10
Q

What are ‘catch-up contributions’?

A

Additional contributions allowed for individuals aged 50 and older.

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11
Q

Multiple choice: Which of the following retirement plans is specifically for self-employed individuals? A) 403(b), B) SEP IRA, C) 457(b), D) SIMPLE IRA

A

B) SEP IRA

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12
Q

What is the role of the plan administrator?

A

To manage the retirement plan and ensure compliance with regulations.

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13
Q

True or False: All retirement plans must comply with ERISA regulations.

A

False

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14
Q

What is an ‘IRA’?

A

Individual Retirement Account, a tax-advantaged retirement savings account.

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15
Q

Fill in the blank: The __________ provides tax advantages for retirement savings.

A

tax code

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16
Q

What does ‘fiduciary responsibility’ mean in the context of retirement plans?

A

The obligation to act in the best interest of plan participants.

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17
Q

Multiple choice: Which type of plan is typically funded solely by employer contributions? A) 401(k), B) Traditional IRA, C) Defined benefit plan, D) Roth IRA

A

C) Defined benefit plan

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18
Q

What is a ‘pension plan’?

A

A retirement plan that provides a fixed monthly benefit at retirement, based on salary and years of service.

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19
Q

True or False: Roth IRAs allow for tax-free withdrawals in retirement.

A

True

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20
Q

What is the significance of the ‘safe harbor’ provision?

A

It provides certain protections for plan sponsors against fiduciary liability.

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21
Q

Fill in the blank: The __________ is the government agency that oversees retirement plans.

A

Department of Labor

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22
Q

What is ‘automatic enrollment’ in retirement plans?

A

A feature that automatically enrolls employees in a retirement plan unless they opt out.

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23
Q

Multiple choice: Which of the following is a disadvantage of defined benefit plans? A) Predictable benefits, B) Complexity, C) Employee control, D) Tax advantages

A

B) Complexity

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24
Q

What is the ‘70½ rule’ related to retirement accounts?

A

The requirement to start taking minimum distributions from retirement accounts at age 70½.

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25
Q

True or False: All retirement plans allow for loans against the account balance.

A

False

26
Q

When was the first US pension plan offered what year

A

1875

27
Q

What year did legislation encourage private pensions?

A

1920

28
Q

What year did legislation encourage private pensions?

A

1920

29
Q

When was the Social Security act passed?

A

1940

30
Q

What year did the prevalence and support of unions increase?

A

1950s

31
Q

What year did retirement plans receive legislative protection from fraud?

A

1970

32
Q

What year were tax deferred direct contribution programs established?

A

1980s

33
Q

What year did the prevalence of hybrid plants increase?

A

1990s

34
Q

What year did the concern for economic security cost-effectiveness incorporate governance appear regarding retirement plans

A

2000s

35
Q

What year did Roth 401(k) plans emerge?

A

2006

36
Q

Define globalism

A

The move from competing domestically to competing globally

Labor cost became growing factor to compete

The risk and carrying cost of direct benefits became a disadvantage

The Rise & Fall of unions

37
Q

How did the shift from manufacturing to a service and technology based economy, influence the shift to define contribution plans?

A

Less employment for life view by workers

Shift to a mortgage gig economy

Employees are less committed to employers for long haul

38
Q

What led to the rise of the 401(k) in the 1980s?

A

The ability to create tax deferred saving it was a novel idea

The creation of mutual funds - more people could invest benefit from the market

Employees, value and account balances through direct contribution plans

Employers could require participation before the company match is made resulting in cost savings

39
Q

How has risk and cost shifting impacted a shift to define contribution plans?

A

Employers have continued to place more responsibility on workers

Health insurance moved from zero deductible to HSANHDHP plans

401(k) 403B and thrift plans - the need for employees to invest their own money

40
Q

Common characteristics shared across direct contribution plan types

A

Separate participant accounts

Employer and or employee contributions

Contributions usually expressed as a percentage of pay

Government limits on contributions allowed

Investment risk is born by the employee

41
Q

What are advantages of a direct contribution plan for an employer?

A

Contributions represent the majority of plan expenses

Expenses can be easily budgeted

Typically, there are no actuarial expense

There is less potential involvement of third parties

42
Q

What are advantages of direct contribution plans for the employee?

A

More control over employer provide provided investments than direct benefits plans

Portable tax deferred retirement vehicle

43
Q

What are disadvantages of the direct contribution plan for an employer?

A

The complexity of legal requirements(non-discrimination, testing, and fiduciary responsibilities

May not provide the desired benefits at the time that the employer wants individuals to retire

44
Q

What are disadvantages of direct contribution plans for the employee?

A

Requires greater financial awareness and education of investments in order to achieve retirement objectives

May not provide the desired benefit when the employee is ready to retire

45
Q

What are common types of direct contribution plans used in the workplace?

A

401(k)
403B
457B
IRA
Savings thrift
Profit-sharing
Money purchase
ESOP
Target benefits

46
Q

What year did Internal Revenue Code 401K become established?

A

1978

47
Q

What’s the difference between a traditional IRA and a Roth IRA

A

Traditional IRA the contributions are tax deductible than taxed at a future rate

Roth IRA, the contributions are not tax deductible, but qualified withdraws are exempt from federal tax later

48
Q

What’s the definition of a savings/thrift plan.

A

A plan that allows employees to make contributions on a discretionary basis with limits. Employee contributions may be matched by the employer.

49
Q

What are some features of the saving/thrift plan?

A

Plans generally are designed to supplement other retirement plans, including direct benefit plans

Contributions are commonly made with after tax earnings if there’s no 401(k) feature

50
Q

What’s the definition of a profit-sharing plan?

A

Profit-sharing plans are popular to share the success of the organization with employees. The employer has a fair amount of discretion in deciding how much to allocate to individual employee accounts, although an annual contributions are subject to IRC limitations.

51
Q

What’s the definition of a money purchase plan?

A

A plan in which the employer contribution to the employees account is based on a formula example 5% of pay regardless of profit

52
Q

What are features of a money purchase plan?

A

Include contributions from employer and employee

Does not allow pre-tax contributions

No 401(k) plan features

Annual contribution required, regardless of company profits

Payout is in the form of an annuity

53
Q

What’s the definition of an ESOP? (Employee stock ownership plan)

A

A plan that enables qualified employees to receive shares that they accrued as planned participants upon retirement or separation from the organization

54
Q

What’s the definition of a hybrid retirement plan?

A

Combination of a direct contribution and direct benefits plan

55
Q

Why are employers shifting from a direct benefits plan to a hybrid plan?

A

Improved portability

Transfer of risk to the employee

Increase flexibility and plan design

Increased employee, understanding and participation

Reduced administrative expenses

Reduced funding expenses versus a traditional, direct benefits plan

56
Q

What is a retirement cash balance plan?

A

The most prevalent direct benefit hybrid plan is the cash balance plan

A cash balance pension plan is a pension plan with the option of a lifetime annuity. For a cash balance plan, the employer credits, the participants account with a set percentage of their yearly compensation plus interest charges.

The company bears all ownership of profits and losses in the portfolio

57
Q

What’s the definition of a target benefit plan?

A

Typically used by smaller companies

Target benefits, plans, introduce age factors allocating higher contributions for employees near retirement and lower contributions for younger short service employees

Target benefit plans typically provide a targeted amount of pension at normal retirement usually age 65

58
Q

What does a 401(k) feature in a direct contribution plan do

A enable qualified employees to buy company stock at a reduced price

B includes a predetermined and defined formula for allocating profit shares among participants

C enables employees to make pre-tax contributions through salary reduction agreements

D credits, employees accounts with varying contribution, percentages calculated individually at the time of plan inception

A

C enables employees to make pretax contributions through salary reduction agreements

59
Q

Which of the following best describes a money purchase plan

A an employer, contributes to the employees account based on a formula, regardless of profits

B employees, retirement funds are comprised mostly of company stock

C stock ownership in private organizations is transferred from owners to employees

D employee sharing the success of the organization

A

A an employer, contributes to the employees account based on a formula, regardless of profits

60
Q

Which plan allows employees to make contributions on a discretionary basis with limits

A money purchase plan

B employee stock option plan

C savings thrift plan

D profit sharing plan

A

C savings/thrift plan

61
Q

The IRC places certain re-purchase obligations on companies with which one of the following

A target benefits plan

B ESOP

C cash balance plan

D 401(k) feature with a direct contribution plan

A

B ESOP

62
Q

Which of the following plans combines features of a direct benefit plan and those of a direct contribution plan

A money purchase plan

B cash balance plan

C saving/thrift plan

D ESOP

A

B
Cash balance plan

Certified Benefits Professional - Retirement Plans (5 decks)

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