Deck 8: Pension Funds

Question 1

Corporate plan sponsors are inclined to employ as their discount rate for pension liabilities the highest interest rate that will pass muster with ________ (for funding purposes) and also with their external ________ (for accounting purposes).

A) ERISA; cash flow statement
B) the IRS; accounting GAAP
C) PBGC; balance sheet statement
D) the IRS; cash flow statement

Answer 1

B

Question 2

In a ________, the plan sponsor agrees to make specified dollar payments annually to qualifying employees beginning at retirement (and some payments to beneficiaries in case of death before retirement).

A) defined-benefit plan
B) cash balance plan
C) defined-balance plans
D) defined-contribution plans

Answer 2

A

Question 3

To ensure that a pension plan is in compliance with ________, periodic reporting and disclosure statements must be filed with these government agencies.

A) a 401-K plan
B) IRS regulations
C) PBGC
D) ERISA

Answer 3

D

Question 4

A major provision of the Employee Retirement Income Security Act of 1974 (ERISA) is the establishment of ________.

A) funding standards for the minimum contributions that a plan sponsor must make to the pension plan to satisfy the actuarially projected benefit payments.
B) fiduciary standards for pension fund trustees, managers, and advisors.
C) minimum vesting standards.
D) All of these

Question 5

The magnitude of pension ________ suggests that it poses the greatest financial danger facing managers since the S&L crisis.

A) solvency
B) surplus
C) overfunding
D) underfunding

Question 6

There are several fundamental differences between defined-benefit plans and defined-contribution plans. In the defined-benefit plan, the plan sponsor does which of the following?

A) The sponsor does not guarantee the retirement benefit
B) The sponsor does not make the investment choices
C) The sponsor bears the investment risk if the investments earn enough to fund the guaranteed retirement benefits.
D) The sponsor bears the investment risk if the investments do not earn enough to fund the guaranteed retirement benefits.

Question 7

Which of the below statements is TRUE?

A) Insurance companies have not been involved in the pension business through their issuance of GICs and annuities or through subsidiaries.
B) The trust departments of commercial banks do not manage pension funds.
C) Foreign entities are permitted to participate in the management of pension funds.
D) A very large number of foreign financial institutions have acquired interests in U.S. bond management firms in order to enter the pension fund money management business.

Question 8

A ________ is similar to some types of defined-contribution plans, particularly money purchase plans and profit sharing plans, according to which the employer contributes at a fixed rate but does not guarantee benefit.

A) cash balance plan
B) managerial balance plan
C) defined-contribution plans
D) defined-balance plans

Question 9

A study by Zion and Carcache of Credit Suisse First Boston estimated that if the companies included in the Standard & Poor's 500 index had replaced the ROA projections for their pension plans with the plans' actual performance, the companies' aggregate reported earnings would have ________.

A) increased greatly.
B) increased moderately.
C) declined.
D) remained the same.

Question 10

The aggregate asset mix of the 1,000 top defined-benefit and defined-contribution pension plans as of September 30, 2007, indicate that the asset allocations for corporate and public defined-benefit plans are very similar, with approximately ________ of their assets in U.S. stocks and bonds.

A) 65%
B) 60%
C) 55%
D) 50%

Question 11

In a defined-contribution plan, the amount contributed is typically ________.

A) a percentage of the employee's salary.
B) either a percentage of the employee's salary and/or a percentage of the employer's profits.
C) a percentage of the employee's salary.
D) a percentage of the employee's tenure.

Question 12

Qualified pension plans ________ invest in tax-exempt assets.

A) rarely
B) never
C) often
D) always

Question 13

Which of the below statements is TRUE?

A) An insured plan is always safer than a noninsured plan.
B) A federal agency, the Pension Benefit Guaranty Corporation (PBGC) does not insure the vested benefits of participants.
C) Defined benefit plans that are guaranteed by life insurance products are called insured benefit plans.
D) A plan sponsor establishing a defined-benefit plan cannot use the payments made into the fund to purchase an annuity policy from a life insurance company.

Question 14

In regards to the defined-benefit pension assets under its control, a plan sponsor chooses ________.

A) to use out-of-house staff to manage all the pension assets itself.
B) to use in-house staff to manage part of the pension assets.
C) to distribute the pension assets to one money management firm to manage.
D) to distribute the pension assets to one or more money management firms to manage.

Question 15

Pension funds have become important because ________.

A) income and wealth have declined steadily over the post-World War II period, leaving households less money for long-term savings.
B) people are living longer and can expect less financial needs for longer retirement periods.
C) pensions represent compensation to employees that is free of tax liability to the employee until after the workers retire and their income from employment ceases.
D) employer contributions are not tax deductible to the employer.

Question 16

The key factor in explaining ________ growth is that the employer's contributions and a specified amount of the employee's contributions, as well as the earnings of the fund's assets, are tax exempt.

A) health benefit
B) pension fund
C) dividend
D) capital gains

Question 17

In addition to money managers, advisors called plan sponsor consultants provide other advisory services to pension plan sponsors. Which of the below is NOT a service that consultants provide to advisors?

A) Consultants give general and comprehensive research
B) Consultants give actuarial advice (liability modeling and forecasting)
C) Consultants measure and monitor the performance of the fund's money managers
D) Consultants search for and recommend money managers to pension plans

Question 18

A ________ is a fund that is established for the eventual payment of retirement benefits.

A) pension plan
B) benefit plan
C) health plan
D) social security plan

Question 19

Defined-benefit pension plans are ________ for the plan sponsor to administer and are not portable from one job to another by employees in ________.

A) manageable; a decreasingly mobile workforce
B) manageable; increasingly mobile workforce
C) cumbersome; decreasingly mobile workforce
D) cumbersome; an increasingly mobile workforce

Question 20

Which of the below is NOT a type of pension plan?

A) defined-benefit plans
B) defined-contribution plans
C) defined-balance plans
D) cash balance plan

Question 21

A major change of the Pension Fund Protection Act of 2006 required underfunded plans to pay additional premiums to the Pension Benefit Guaranty Corporation (PBGC).

Question 22

Pension plan sponsors may be private business entities acting for their employees; federal, state, and local entities on behalf of their employees; unions on behalf of their members; and individuals for themselves.

Question 23

Describe the essence of a qualified fund.

Question 24

Defined-contribution pension plans come in several legal forms: 401(k) plans, money purchase pension plans, and employee stock ownership plans (ESOPs).

Question 25

ERISA created the Pension Benefit Guaranty Corporation (PBGC) to insure vested pension benefits.

Question 26

The first part of the Pension Protection Act of 2006 (PPA) modified ERISA. Which of the below was NOT a major modification?

A) It required underfunded plans to pay additional premiums to the Pension Benefit Guaranty Corporation (PBGC).
B) It tightened the requirement for companies terminating their pension plans to provide extra funding to the pension system.
C) It closed loopholes that allowed underfunded plans to skip pension payments.
D) It required that companies measure their pension plan obligations more accurately.

Question 27

With respect to the Pension Funding Equity Act of 2004, the act was a boon to companies and solved the serious problems plaguing pension funding.

Question 28

The ________ enables employees to obtain more investment advice for their employers by removing the fiduciary liability based on the perceived conflict of interest of self-interested investment advice provided by the employer.

A) Employee Retirement Income Security Act (ERISA) of 1974
B) Pension Benefit Guaranty Corporation (PBGC) established in 1974
C) Social Security Benefit Act of 1935
D) Pension Protection Act of 2006 (PPA)

Question 29

The defined-contribution pension plan is a new hybrid plan that combines features of the defined-benefit plan and the defined-contribution plan.

Question 30

The largest share of both defined-benefit and defined-contribution pension fund assets is invested in common stocks, often a U.S. stock index.

Question 31

The Pension Protection Act of 2006 (PPA) provides ________.

A) significant changes in the operations of private pension plans.
B) insignificant changes in the operations of public pension plans.
C) reduces some tax incentives for retirement savings.
D) reduces all tax incentives for retirement savings.

Question 32

The Social Security Act of 1935 provided employers with a safe harbor from certain parts of ERISA.

Question 33

Regulations issued by the U.S. Department of Labor require firms to offer their employees a set of distinctive choices, a development that has encouraged pension plans to avoid mutual funds as the investment vehicle of choice.

Question 34

The purpose of the Pension Funding Equity Act of 2006 was to give U.S. companies some "relief" from burdensome pension contributions.

Question 35

What is a pension fund? In your answer comment on (a) pension plan sponsors, (b) how they are financed, and (c) the key factor in explaining pension fund growth.

Question 36

Explain the difference between a defined-benefit pension plan and a defined-contribution pension plan.

Question 37

In a qualified pension plan, contributions (up to some extent) and earnings thereof are tax-exempt.

Question 38

ERISA established fiduciary standards for pension fund trustees, managers, and advisors. Specifically, all parties responsible for the management of a pension fund are guided by the judgment of what is called a "wild man" in seeking to determine which investments are proper.

Question 39

The great success of private pension plans is somewhat surprising because the system involves investing in an asset (i.e., the pension contract) that for the most part is very liquid.

Question 40

Qualified pension funds invest in assets that have the advantage of being largely or completely tax exempt.

Question 41

Describe the players chosen by a plan sponsor to manage the defined-benefit pension assets.

Question 42

The Pension Protection Act of 2006 (PPA) contains two major parts. Describe these two parts.

Question 43

Explain the "prudent man" concept.