Module 2 Defined Contribution Plans Flashcards
What is the primary purpose of a retirement plan?
To provide income to individuals during their retirement years.
True or False: Defined benefit plans guarantee a specific payout at retirement.
True
Fill in the blank: A __________ plan allows employees to contribute a portion of their salary to a retirement account.
Defined contribution
What is a common feature of 401(k) plans?
Employee contributions are often matched by the employer up to a certain percentage.
Multiple choice: Which of the following is NOT a type of retirement plan? A) 401(k), B) IRA, C) HSA, D) Pension
C) HSA
What does ‘vesting’ refer to in retirement plans?
The process by which an employee earns the right to keep employer contributions to their retirement plan.
True or False: Participants in a defined contribution plan bear the investment risk.
True
What is the typical age for penalty-free withdrawals from retirement accounts?
59½ years old
Fill in the blank: The __________ is the maximum annual contribution limit for a 401(k) plan.
contribution limit
What are ‘catch-up contributions’?
Additional contributions allowed for individuals aged 50 and older.
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
B) SEP IRA
What is the role of the plan administrator?
To manage the retirement plan and ensure compliance with regulations.
True or False: All retirement plans must comply with ERISA regulations.
False
What is an ‘IRA’?
Individual Retirement Account, a tax-advantaged retirement savings account.
Fill in the blank: The __________ provides tax advantages for retirement savings.
tax code
What does ‘fiduciary responsibility’ mean in the context of retirement plans?
The obligation to act in the best interest of plan participants.
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
C) Defined benefit plan
What is a ‘pension plan’?
A retirement plan that provides a fixed monthly benefit at retirement, based on salary and years of service.
True or False: Roth IRAs allow for tax-free withdrawals in retirement.
True
What is the significance of the ‘safe harbor’ provision?
It provides certain protections for plan sponsors against fiduciary liability.
Fill in the blank: The __________ is the government agency that oversees retirement plans.
Department of Labor
What is ‘automatic enrollment’ in retirement plans?
A feature that automatically enrolls employees in a retirement plan unless they opt out.
Multiple choice: Which of the following is a disadvantage of defined benefit plans? A) Predictable benefits, B) Complexity, C) Employee control, D) Tax advantages
B) Complexity
What is the ‘70½ rule’ related to retirement accounts?
The requirement to start taking minimum distributions from retirement accounts at age 70½.
True or False: All retirement plans allow for loans against the account balance.
False
When was the first US pension plan offered what year
1875
What year did legislation encourage private pensions?
1920
What year did legislation encourage private pensions?
1920
When was the Social Security act passed?
1940
What year did the prevalence and support of unions increase?
1950s
What year did retirement plans receive legislative protection from fraud?
1970
What year were tax deferred direct contribution programs established?
1980s
What year did the prevalence of hybrid plants increase?
1990s
What year did the concern for economic security cost-effectiveness incorporate governance appear regarding retirement plans
2000s
What year did Roth 401(k) plans emerge?
2006
Define globalism
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
How did the shift from manufacturing to a service and technology based economy, influence the shift to define contribution plans?
Less employment for life view by workers
Shift to a mortgage gig economy
Employees are less committed to employers for long haul
What led to the rise of the 401(k) in the 1980s?
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
How has risk and cost shifting impacted a shift to define contribution plans?
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
Common characteristics shared across direct contribution plan types
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
What are advantages of a direct contribution plan for an employer?
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
What are advantages of direct contribution plans for the employee?
More control over employer provide provided investments than direct benefits plans
Portable tax deferred retirement vehicle
What are disadvantages of the direct contribution plan for an employer?
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
What are disadvantages of direct contribution plans for the employee?
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
What are common types of direct contribution plans used in the workplace?
401(k)
403B
457B
IRA
Savings thrift
Profit-sharing
Money purchase
ESOP
Target benefits
What year did Internal Revenue Code 401K become established?
1978
What’s the difference between a traditional IRA and a Roth IRA
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
What’s the definition of a savings/thrift plan.
A plan that allows employees to make contributions on a discretionary basis with limits. Employee contributions may be matched by the employer.
What are some features of the saving/thrift plan?
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
What’s the definition of a profit-sharing plan?
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.
What’s the definition of a money purchase plan?
A plan in which the employer contribution to the employees account is based on a formula example 5% of pay regardless of profit
What are features of a money purchase plan?
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
What’s the definition of an ESOP? (Employee stock ownership plan)
A plan that enables qualified employees to receive shares that they accrued as planned participants upon retirement or separation from the organization
What’s the definition of a hybrid retirement plan?
Combination of a direct contribution and direct benefits plan
Why are employers shifting from a direct benefits plan to a hybrid plan?
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
What is a retirement cash balance plan?
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
What’s the definition of a target benefit plan?
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
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
C enables employees to make pretax contributions through salary reduction agreements
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 an employer, contributes to the employees account based on a formula, regardless of profits
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
C savings/thrift plan
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
B ESOP
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
B
Cash balance plan
