Deck 21: Employment-Based and Individual Longevity Risk Management

Question 1

Under the traditional defined benefit plan, the employer guarantees only the annual contribution but not any returns.

Answer 1

False

Question 2

The time during which premiums are being paid and benefits (distribution) have not begun is called the accumulation period.

Answer 2

True

Question 3

For annuities that are bought with after-tax money by individuals, ordinary income taxes are paid on the return of investment earnings.

Answer 3

True

Question 4

All defined benefit plans may provide for adjustments to account for inflation during the retirement years.

Question 5

Distributions are benefits paid out to participants or their beneficiaries, usually at retirement.

Question 6

Guaranteed mortality factors and investment return factors exist in fixed amount annuity.

Question 7

The agent or broker receive a normal level of sales commission on no-load and low-load annuities and the commission is deducted directly from the contributions.

Question 8

Target plans are aimed at providing every employee the same formula of benefit at retirement.

Question 9

A qualified retirement plan must be for the exclusive benefit of the employees rather than their beneficiaries.

Question 10

Target pension plan is a defined contribution plan which favors newer employees of the organization.

Question 11

An employer provides a defined benefit plan and has opted for graded vesting.Under this plan, the employees are eligible for 80 percent of employer contributions after four years.

Question 12

In a deferred profit-sharing plan, the employees are given the shares of profit, based on the total experience, as a component of their monthly compensation.

Question 13

In a qualified retirement plan, employer contributions to an employee's pension during the employee's working years are deductible as a business expense and are not taxable income to the employee until they are received as benefits.

Question 14

The profit-sharing plan is funded at the discretion of the employer during periods of profits, whereas pension plans require annual minimum funding.

Question 15

A refund annuity guarantees that the annuitant and/or beneficiary will receive, during the liquidation period, minimum payments equal to the single premium in an immediate annuity or the accumulation value in a deferred annuity.

Question 16

The most popular defined benefit formula is the percentage unit benefit plan which recognizes both the employee's years of service and level of compensation.

Question 17

During the liquidation or distribution period, annuity units are exchanged for dollar value of the annuity.

Question 18

The cash balance plan provides a specific amount of benefit that will be available for the employee at retirement.

Question 19

An employee who has not reached twenty-one years of age is not eligible for protection under ERISA.

Question 20

A defined contribution (DC) plan is a qualified pension plan in which the contribution amount and the benefit amount available at retirement is clearly defined.

Question 21

An employer opts for Cliff vesting in one of their defined contribution plans under the Pension Protection Act of 2006.Here, an employee can obtain full vesting of employer contributions:

A)after three years.
B)at the retirement age.
C)after two years.
D)at the vesting age determined by the company.
E)at the vesting age specified by ERISA.

Question 22

Which of the following provisions gives lifetime benefits to the spouse if the participant dies before the earliest retirement age allowed by the plan?

A)Cliff vesting annuity
B)Fixed dollar annuity
C)Pre-retirement survivor annuity
D)Immediate annuity
E)Graded vesting annuity

Question 23

Supplemental costs are the amounts necessary to:

A)provide retirement benefits to temporary employees.
B)pay the insurance premiums of pensioners.
C)amortize any past service liability.
D)fund the pension benefit during the employee's working years.
E)pay the pension amount of employees covered under fixed-benefit plan.

Question 24

A plan specifies that the employer will contribute 10 percent of an employee's current salary.This plan is referred to as a(n):

A)money purchase plan.
B)target plan.
C)unit benefit plan.
D)supplemental benefit plan.
E)defined contribution plan.

Question 25

In a retirement plan, the employer commits to contribute a certain percentage of compensation each year and guarantees a rate of return.Under this arrangement, employees are able to calculate the exact lump sum that will be available to them at retirement because the employer guarantees both contributions and earnings.This plan is an example of _____.

A)cash balance plans
B)profit sharing plans
C)traditional defined benefit plans
D)money purchase plans
E)target pension plans

Question 26

Top-heavy plans are plans where:

A)the employee has to pay all of the fund contribution in exchange of a tax benefit.
B)the owners or highest-paid employees hold over 60 percent of the value of the pension plan.
C)the company contributes more to the plan than the employee.
D)the employee and employer can obtain heavy tax benefits simultaneously.
E)the employer has to pay all of the fund contribution by classifying it as a business expense.

Question 27

Which of the following plans is a promise from the employer that the employee will receive a certain amount of income replacement at retirement?

A)Cash balance plan
B)Profit-sharing plan
C)Money purchase plan
D)Deferred profit-sharing plan
E)Traditional defined benefit plan

Question 28

In the deposit administration arrangement, employer makes a one-time payment to the insurance company on behalf of employees.

Question 29

In order to calculate the employer contribution, a publishing company uses a defined benefit formula that recognizes both the employee's years of service and level of compensation.This defined benefit formula is called:

A)career average formula.
B)fixed percentage formula.
C)final average formula.
D)unit benefit plan.
E)initial average formula.

Question 30

This plan sets up a hypothetical individual account for each employee, and credits each participant annually with a plan contribution.The employer also guarantees a minimum interest credit on the account balance.Identify this plan.

A)Unit benefit plan
B)Money purchase plan
C)Target pension plan
D)Profit sharing plan
E)Cash balance plan

Question 31

Most nonqualified plans:

A)are designed to benefit the majority of employees in an organization.
B)are designed for lower level employees and temporary workers.
C)allow employer funding contributions to be deducted as a business expense.
D)are intended to obtain tax benefits rather than employee satisfaction.
E)are for executives and designed to benefit only a small group of highly paid executives.

Question 32

The normal retirement age is the age at which:

A)employee completes twenty-five years of service.
B)full vesting of employer contribution becomes available for employees.
C)the employer contribution becomes equal to employee contribution.
D)full retirement benefits become available to retirees.
E)employee completes twenty years of service.

Question 33

Which of the following types of plans is considered to be a hybrid plan?

A)Money purchase plan
B)Traditional defined benefit plan
C)Cash balance plan
D)Profit-sharing plan
E)Cost-sharing plan

Question 34

Under the money purchase plan, the employer:

A)commits to contribute a certain percentage of compensation each year and guarantees a rate of return.
B)provides certain benefits that are not explicitly defined.
C)promises a certain amount of income replacement to the employees at retirement.
D)allows the employees to select the employer contribution subject to certain limitations.
E)guarantees only the annual contribution but not any returns.

Question 35

Which of the following is a drawback of Employee Retirement Income Security Act of 1974?

A)Lower-level employees did not get protection under the act.
B)The act failed to address portability issues when employees changed jobs.
C)The act and its amendments did not cover fiduciary responsibilities.
D)The act is believed to cause discrimination amongst employees of an organization.
E)Reporting and disclosure rules were not given importance in the act.

Question 36

In a qualified plan, employer contributions:

A)are significantly high compared to employee contributions.
B)cannot be deducted as a business expense.
C)are classified as taxable compensation to the employee.
D)are not taxable until employees receive them as benefits.
E)are significantly low compared to employee contributions.

Question 37

Identify a situation in which an employee will not get protection under ERISA.

A)The employee has worked only for two years.
B)The employee has worked only for 1200 hours.
C)The employee has not reached twenty-one years of age.
D)The employee was hired at the age of sixty-five.
E)The employee is highly compensated.

Question 38

Which of the following requirements should be fulfilled by a plan to be qualified?

A)The plan must be designed to be permanent and have continuing contributions.
B)The plan must be legally binding, in writing, and communicated clearly to all the stakeholders of the company.
C)The plan must be for the exclusive benefit of the employees rather than their beneficiaries.
D)The plan must not be applicable to the highly compensated employees of the organization.
E)The principal or income of the pension plan cannot be diverted to any other purpose even if the assets exceed those required to cover accrued pension benefits.

Question 39

Which of the following is an example of a qualified pension plan where the contribution amount is defined but the benefit amount available at retirement varies?

A)Traditional defined benefit plan
B)Money purchase plan
C)Integrated plan
D)Cash balance plan
E)Unit benefit plan

Question 40

Final average formula sets the compensation base as:

A)average compensation of employees in the organization.
B)compensation for a recent number of years.
C)career average compensation of the employee.
D)average compensation of employees in the employee's department.
E)the total salary earned by the employee and the total experience.

Question 41

Savings Incentive Match Plan for Employees (SIMPLE) plans are for employers:

A)multiple working locations.
B)who have dangerous working conditions.
C)more temporary employees than permanent employees.
D)with one hundred employees or less.
E)with more than 1000 employees.

Question 42

An employer purchases an annuity, each year for each employee, which would pay retirees a fixed sum per month beginning at age sixty-five.This is an example of:

A)group deferred annuity.
B)deposits administration arrangement.
C)separate account plan.
D)guaranteed investment contract.
E)immediate participation guarantee.

Question 43

What is a defined contribution plan? How is it different from a defined benefit plan? Provide examples.

Question 44

You own an annuity plan that gives you the freedom to change the amount of contributions, stop contributions, and resume them at will.This plan is called:

A)single premium deferred annuity.
B)single premium immediate annuity.
C)flexible premium deferred annuity.
D)accumulation annuity.
E)variable premium annuity.

Question 45

Differentiate between contributory and noncontributory retirement plans.

Question 46

Compare and contrast accumulation and liquidation.

Question 47

During the liquidation or distribution period, annuity units are exchanged for:

A)dollar value of annuity.
B)preference shares.
C)stock options.
D)unit plans.
E)accumulation units.

Question 48

Clarke works in a manufacturing company as a production supervisor.He participates in the employer-sponsored retirement plan.For Clarke, the maximum amount of tax-deferred IRA contribution depends on:

A)income earned from fixed investments alone.
B)income earned from work alone.
C)income earned from work and fixed investments.
D)Income earned from work and social security.
E)Income earned from employment and non-employment sources.

Question 49

In a deferred profit-sharing plan, a firm:

A)contributes an age-weighted share of profits to employee funds.
B)pays dividends to employees an year after realizing the profits.
C)pays a small part of the profits along with salaries.
D)puts part of its profits in trust for the benefit of employees.
E)provides and experience-based share of profits to employees.

Question 50

Which of the following types of annuities guarantees that the annuitant and/or beneficiary will receive, during the liquidation period, minimum payments equal to the single premium in an immediate annuity or the accumulation value in a deferred annuity?

A)Temporary annuity
B)Refund annuity
C)Joint annuity
D)Deferred annuity
E)Structured settlement annuity

Question 51

Briefly describe the insurer options available for funding pension plans.

Question 52

Which of the following employee benefit plans can be considered as a special form of profit sharing plans?

A)Employee stock ownership plan
B)Target plan
C)Unit benefit plan
D)Cash balance plan
E)Keogh plans

Question 53

_____ annuity is a special type of single premium immediate annuity issued by a life insurer and its terms are negotiated by the plaintiff, the defendant, and their attorneys.

A)Structured settlement
B)Accumulated
C)Surrender value
D)Unstructured resolution
E)Flexible resolution

Question 54

In a(n) _____ plan employer contributions to an employee's pension during the employee's working years are deductible as a business expense but are not taxable income to the employee until they are received as benefits.

Question 55

Which of the following is a critical difference between SEP- individual retirement accounts and other individual retirement accounts?

A)Employee contribution is very high in SEP-IRAs.
B)The limits of SEP-IRAs are substantially larger than other IRAs.
C)Employee contribution is taxable in SEP-IRAs.
D)Annual deduction limits are not applicable for SEP-IRAs.
E)Only a narrow cross section of employees is included in the SEP.

Question 56

What is a simplified employee pension plan? Compare them with the regular individual retirement account.

Question 57

An individual work full-time for salary but part-time as an accountant in the evenings and on weekends.Which of the following plans is suitable if this employee wants to establish a plan based on self-employment earned income?

A)Target plan
B)Unit benefit plan
C)Cash balance plan
D)Money purchase plan
E)Keogh plans

Question 58

The person or entity that purchases an annuity is called:

A)beneficiary.
B)recipient.
C)annuitant.
D)owner.
E)holder.

Question 59

A defined contribution plan is a qualified pension plan in which:

A)social security benefits are combined with the benefits of private plans.
B)employer pays a small percentage of the profits along with salaries.
C)the contribution amount is identified but the benefit amount available at retirement varies.
D)a firm bases its contributions on the estimations of an actuary or an analyst.
E)the employers select the formula that best meets both the needs of employees for economic security.

Question 60

What are the major areas covered under Employee Retirement Income Security Act of 1974 and subsequent amendments? What are its shortcomings?

Question 61

_____ are for people who earn self-employment income and contributions can be made based on either full- or part-time employment.

Question 62

_____ reflect the annual amount needed to fund the pension benefit during the employee's working years.

Question 63

A(n) _____ is a qualified pension plan in which the contribution amount is defined but the benefit amount available at retirement varies.

Question 64

_____ are arrangements used by insurers to guarantee competitive rates of return on large, lump-sum transfers of pension funds, usually from another type of funding instrument.

Question 65

_____ annuity allows you to change the amount of contributions, stop contributions, and resume them at will.

Question 66

_____ is a special type of single premium immediate annuity issued by a life insurer and its terms are negotiated by the plaintiff, the defendant, their attorneys, and a structured settlement specialist.

Question 67

A(n) _____ requires the employee to pay all or part of the pension fund contribution.

Question 68

When the compensation base is described as compensation for a recent number of years, the formula is referred to as a _____.

Question 69

_____ plan is a form of deposit administration where the employer makes regular deposits to a fund managed by the insurance company.

Question 70

_____ are retirement plans in which the owners or highest-paid employees hold over 60 percent of the value of the pension plan.

Question 71

Under the _____ plan, each employee is targeted to receive the same formula of benefit at retirement (age sixty-five), but the benefits are not guaranteed.

Question 72

With a _____ plan the employer creates a trust to accumulate funds and disburse benefits.

Question 73

A(n) _____ plan has the distinguishing characteristic of clearly defining, by its benefit formula, the amount of benefit that will be available at retirement.

Question 74

_____ is a contract between the insurer and the employer to provide for the purchase of specified amounts of deferred annuity for employees each year.

Question 75

Once the participant reaches the earliest retirement age allowed by the plan, the spouse becomes eligible for benefits under a(n) _____ option.