Retirement - 46: Defined Contribution & Defined-Benefit Plan Characteristics

Question 1

The plan document specifies the employer contributions.

Answer 1

Defined-contribution

Question 2

The plan document specifies employee benefits, and then employer contributions are determined by actuarial computations. Assumptions include investment return, life expectancy of retirees, number of employees who reach retirement (turnover), and salary levels of employees prior to retirement.

Answer 2

Defined-benefit

Question 3

Employers’ deductible contribution is limited to 25% of participant payroll.

Answer 3

Defined-contribution

Question 4

Annual benefit limit: (1) $210,000 or (2) 100% of the top 3 consecutive years’ compensation. The employer must satisfy minimum standards and can deduct more than 25% of payroll.

Answer 4

Defined-benefit

Question 5

Subject to section 415 “annual additions limits” of the lesser of 100% compensation or $52,000.

Answer 5

Defined-Contribution

Question 5

Individual accounts are established.

Answer 5

Defined-contribution

Question 6

Not subject to section 415 “annual additions limits.”

Answer 6

Defined-benefit

Question 7

No individual accounts, just commingled funds.

Answer 7

Defined-benefit

Question 9

Voluntary employee contributions are allowed in some plans, such as 401(k) salary deferrals.

Answer 9

Defined-contribution

Question 10

Employees do not contribute.

Answer 10

Defined-benefit

Question 10

Forfeitures reduce the employer’s contributions.

Answer 10

Defined-benefit

Question 11

Forfeitures can be reallocated to the remaining employees or used to offset future employer contributions.

Answer 11

Defined-contribution

Question 13

Employers do not guarantee a particular level of benefit at retirement; benefits depend on investment return and number of years of contributions.

Answer 13

Defined-contribution

Question 14

Employee benefit levels are specified and guaranteed.

Answer 14

Defined-benefit

Question 15

Employees bear the investment risk (including inflation risk before retirement, and investment performance).

Answer 15

Defined-contribution

Question 15

Favors younger employees.

Answer 15

Defined-contribution

Question 16

Investment risk is born by employers (who must increase contributions to make up shortfalls).

Answer 16

Defined-benefit

Question 17

Favors older employees.

Answer 17

Defined-benefit

Question 19

Contributions can be allocated based on age-weighting and cross-testing to provide greater benefits to key employees or owners, but cannot be based on past service.

Answer 19

Defined-contribution

Question 19

Lower administrative costs.

Answer 19

Defined-contribution

Question 20

Benefits can be provided based on past service (entry age normal), and higher contributions are made for older, or highly-paid employees.

Answer 20

Defined-benefit

Question 21

Higher administrative costs.

Answer 21

Defined-benefit

Question 22

Costs are predictable.

Answer 22

Defined-contribution

Question 23

Costs are less predictable.

Answer 23

Defined-benefit

Question 24

No PBGC insurance coverage.

Answer 24

Define-contribution

Question 25

PBGC insurance coverage is provided

Answer 25

Defined-benefit