2 - Understanding Retirement Risks

Question 1

IMPORTANT

A successful defined contribution type of retirement system depends on a number of critical factors. Among these factors are (5):

Answer 1

1. adequacy of contributions
2. the right array of investment options
3. financial education for plan participants
4. plan features that assist in protecting against poor decision making by participants
5. important policies and practices related to eventual distribution of plan assets.

Question 2

the following factors contribute to retirement insecurity (risk). (4)

Answer 2

1. resource shortfalls
2. cataclysmic events (health, etc)
3. environmental changes (tax strucutre, etc)
4. loss of ability to independently manage risks and living needs

Question 3

generally is a living arrangement that encompasses housing and meal arrangements and offers contracts that cover all health care services from assisted living to hospital care and physician’s visits, which are usually already covered by a resident’s private health insurance and/or Medicare.

Answer 3

A life care community

Question 4

Portfolios of assets that fail to outpace _______ cannot succeed in providing adequate purchasing power to retirees

Answer 4

inflation

Question 5

What additional major external and unexpected shocks can affect the resource systems of retirees? (3)

Answer 5

• Dramatic investment losses or the bankruptcy of a former employer
• Economic cycles
• Change in global competition

Question 6

the situation where a person’s extended life span exceeds expectations and results in the depletion of resources expected to be suf cient to meet the material needs of retirement.

Answer 6

Longevity risk

Question 7

describes the phase of life that follows an extended period where individuals engage in some form of work activity attributable to labor. Most forms of work result in income generation, providing resources to sustain the necessities and amenities of life

Answer 7

concept of retirement

Question 8

describe the (3) reasons for retirement accumulation shortfalls

(important)

Answer 8

1. poor planning and provision in income years
2. individuals simply failing to plan adequately even though they possess the necessary resources.
3. Asset erosion or elimination

Question 9

Under a _________, individuals who meet eligibility and service requirements are guaranteed a specific regular and recurring pension payment.

Answer 9

defined benefit

Question 10

Over short time periods there can be substantial ______ and ____ from historical rate-of-return means for defined contribution holdings.

Answer 10

variation

diversion

Question 11

What does an article in On Wall Street skeptical of the “doomsday” scenario for baby boomers entering retirement suggest is the biggest problem for this group? (“Crisis of Expectations”)

Because they have saved less in percentage terms, boomers will have to either (2):

(important)

Answer 11

• lower their standard of living
• work longer to fulfill their expectations.

Question 12

Provisions of the Pension Protection Act (PPA) of 2006 supporting the growth of defined contribution plans (2):

Answer 12

1. plan sponsors to allow investment companies to provide financial advice
2. plan sponsors may automatically enroll participants

Question 13

According to the Society of Actuaries, the components of retirement risks may be grouped into (4):

Answer 13

• Financial and economic risks
• Business and employment risks
• Public policy risks
• Longevity, outliving assets and changes in family structure.

Question 14

What government actions can have implications for the financial status of retirees?

Answer 14

Any revision to tax codes at the federal, state or local level that affects private retirement system benefits

Question 15

(4) Events that can expand retirees’ needs for greater financial resources include

Answer 15

• a catastrophic health event (in some cases, requiring not only more health services but also custodial care),
• divorce or job loss of grown children
• death of a spouse
• divorce of a spouse in retirement.

Question 16

places the responsibility for risk management mostly with the individual plan participant. Therefore, because the individual participant is self-managing his or her account, he or she is often more at risk during market corrections and has fewer options to remedy the adverse conditions

Answer 16

defined contribution

Question 17

the risk of retirees finding themselves with inadequate resources for their living needs either at the onset of their retirement or sometime during their retirement years.

Answer 17

Retirement risk

Question 18

Shift to defined contribution has caused: (2)

Answer 18

• more risk during market corrections
• fewed options to remedy adverse conditions than the employer

Question 19

Regarding decision making on managing retirement risks:

The person managing retirement risks should have _____ available and have the ________ to self-sufficiently manage the risks.

The absence of ___________ can thwart the process and also the aging process can diminish an individual’s competency. Therefore, it would be prudent for an individual to employ a trustee or to establish a process to delegate decision making should the need arise in the future.

(important)

Answer 19

• adequate information
• mental competency
• information

Question 20

One of the findings of a study on the benefits of international investing revealed that depending on prevailing market conditions, there could be very disparate outcomes in ________ for defined contribution participants relative to final salary.

According to the study, an employee investing __% of salary throughout his career could see income replacement ratios at the age of 62 ranging from 52% to ______ of peak earnings. This variation demonstrates the possible effects of a major capital market correction on the commencement of retirement income disbursements

(important)

Answer 20

• income replacement ratios
• 7%
• 115%

Question 21

Provisions of the Pension Protection Act (PPA) of 2006 supporting the growth of defined contribution plans. (2)

Answer 21

1. allow investment companies to provide financial advice to participants
2. clarifies that defined contribution plan sponsors may automatically enroll participants in their plans and use default elections into more balanced investment portfolios.