Question 1

Employer sponsors of defined benefit (DB) plans bear what type of risk&#10;A) Investment risk&#10;B) Longevity risk&#10;C) Managerial risk&#10;D) Both a and b above

Accepted Answer

Employer sponsors of defined benefit plans bear both investment risk and longevity risk. Investment risk arises because the employer is responsible for ensuring that the plan's assets are sufficient to meet future obligations, regardless of how the plan's investments perform. Longevity risk is the risk that retirees live longer than expected, increasing the amount of benefits the employer must pay out.

Question 2

The Social Security program in the United States originally was intended to be&#10;A) A defined benefit plan&#10;B) A defined contribution plan&#10;C) A pay-as-you-go plan&#10;D) A redistributive plan

Accepted Answer

A defined benefit plan is a retirement plan in which the employer promises to pay a specific benefit to the employee at retirement. The Social Security program in the United States is a defined benefit plan because the government promises to pay a specific benefit to retirees based on their earnings history.

Question 3

State and local government pension plans tend to be&#10;A) Defined benefit plans&#10;B) Defined contribution plans&#10;C) Pay-as-you-go plans&#10;D) Redistributive plans

Accepted Answer

State and local government pension plans are typically defined benefit plans, where the benefits are determined by a formula based on factors such as salary history and years of service, rather than being based on investment returns.

Question 4

The returns that participants in DB plans receive on their contributions to the plan&#10;A) Are front loaded-they are highest for short-term participants&#10;B) Are back loaded-they are highest for long-term participants&#10;C) Are neither front nor back loaded&#10;D) Are constant across participants

Accepted Answer

Defined Benefit (DB) plans are typically structured to provide higher benefits to long-term participants, as the benefits are often calculated based on factors such as years of service and salary history. This structure tends to favor those who remain with the employer for a longer period, making the returns "back loaded."

Question 5

The trend in retirement plans has been&#10;A) Toward defined benefit plans&#10;B) Toward defined contribution plans&#10;C) Toward more reliance on Social Security&#10;D) There have been no discernable trends over recent decades

Accepted Answer

The trend in retirement plans has shifted toward defined contribution plans, such as 401(k)s, as they transfer the investment risk from the employer to the employee, unlike defined benefit plans that guarantee a specific payout at retirement. This shift has been notable over recent decades due to factors like cost, flexibility, and the changing landscape of employment and retirement planning.

Question 6

Large concentrations of equity in DB portfolios&#10;A) Adds to variability in DB funding positions&#10;B) Reduces variability in DB funding positions&#10;C) Is immaterial to DB funding positions&#10;D) None of the above

Accepted Answer

Large concentrations of equity in Defined Benefit (DB) portfolios add to the variability in DB funding positions because equities are more volatile than fixed-income investments, leading to greater fluctuations in the value of the portfolio.

Question 7

At times, the following outsourcing is done by pension plans&#10;A) Defined benefit plans outsource to annuity providers&#10;B) Defined contribution plans outsource to open-end mutual funds&#10;C) Pension laws prohibit outsourcing&#10;D) Both a and b

Accepted Answer

Defined benefit plans often outsource to annuity providers to manage the pension payouts, and defined contribution plans frequently outsource to open-end mutual funds to manage the investment options available to plan participants. Pension laws do not prohibit outsourcing; they regulate it to ensure fiduciary responsibilities are met.

Question 8

The reinsurance market&#10;A) Enables double coverage for policy holders&#10;B) Fosters risk reduction by reducing concentration risk&#10;C) Raises concentration risk&#10;D) Is prohibited by regulatory authorities

Accepted Answer

Reinsurance allows insurance companies to share their risk with other insurers, thereby reducing the concentration of risk that any single insurer bears. This process does not double the coverage for policyholders, increase concentration risk, nor is it prohibited by regulatory authorities; instead, it is a common practice in the insurance industry to manage and mitigate risk.

Question 9

Annuities offered by life insurance companies (LICOs)&#10;A) Add to longevity risk profiles&#10;B) Reduce longevity risk profiles&#10;C) Do not affect longevity risk profiles&#10;D) Increase concentration risk

Accepted Answer

Annuities offered by life insurance companies help reduce longevity risk profiles because they provide a guaranteed income for life, mitigating the risk of outliving one's savings.

Question 10

Separate accounts offered by LICOs&#10;A) Add to their risk profiles&#10;B) Reduce their risk profiles&#10;C) Do not affect their risk profiles&#10;D) Increase concentration risk

Accepted Answer

Separate accounts offered by Life Insurance Companies (LICOs) reduce their risk profiles because these accounts are segregated from the company's general account, protecting them from the company's general financial obligations and risks.

Question 11

In contrast to LICOs, property and casualty insurance companies&#10;A) Are major investors in stocks&#10;B) Are major investors in corporate bonds&#10;C) The nature of their business does not result in their investing large amounts of funds in relation to the amount of insurance that they underwrite&#10;D) Are much the same as large institutional investors

Accepted Answer

The answer of In contrast to LICOs, property and casualty...

Deck 20: Large Institutional Investors