Assignment 3 - RP Design

Question 1

1. Income Maintenance (generally DB)

2. Compensation-oriented (generally DC)

Answer 1

(2) ER approaches to retirement design
- -to achieve total compen. objs.
- -integrating benefit plans and direct-pay programs

Question 2

Retirement benefits based on the avg of pay over the EE’s tenure with the comp.

Answer 2

Career Pay

Question 3

Retirement benefits based on the avg of pay during the last 3-5 years of employment

Answer 3

Final Avg Pay

Question 4

Integration of benefit formula w/ SS benef.

Answer 4

Permitted Disparity

Question 5

1. Recruiting an exec. mid-career
2. formula in regular plan doesn’t include bonus compens.
3. nondiscrim. rules may create limitations on the benef. exec. can receive

Answer 5

(3) reasons for a separate exec. retirement prog.

- nonqualified supplemental plan

Question 6

1. compare benef. paid to rep. EEs under diff. circumstances
2. compare actual costs to ER under diff plans.
3. measure plans based on uniform actuarial methods and assumptions
   - industry standards; geog. standards; presence of union

Answer 6

(3) techniques for comparing retirement plans

Question 7

1. EEs’ SS benef.
2. Higher objective benef. for lower-paid EEs than for higher paid EEs
3. Full income-replacement objective for only “career” EE’s
4. Objectives are set based on EE’s pay level during final years (or last 3-5 years) of employment

Answer 7

(4) factors considered in setting income-replacement objs.

Question 8

1. ER’s legal status
2. ER and industry demographics
3. EE demographics
4. ERs w/ diversified ops. must determine the appropriate degree of uniformity for the retirement prog.
5. size of the community where ER is
6. presence of collective bargaining units

Answer 8

(6) Environ. factors to consider for retirement plan designs

Question 9

Emphasis is on protection and continuation of a certain income level when active employment ceases
- DB plan integrated to max with SS benef. or choice of death benef. that provides an income benef. but only to survivors of EE’s immediate family

Answer 9

Income-maintenance Approach

—to providing pension benef.

Question 10

Emphasis is on deferred compensation and the potential for asset accumulation.
- DC contrib. plan as basic prog. for providing retirement

Answer 10

Compensation-oriented Approach

—to providing pension benef.

Question 11

Who bears the risk of inflation and investment?

• -EE versus ER
• -DB versus DC plans

Answer 11

DB Plan = ER

DC Plan = EE

Question 12

Conflicts with coordination retirement benefits w/ SS benef.

Answer 12

• due to the nature of SS benef. and larger value for lower paid EE’s, impossible to achieve an equitable balancing of benef. and costs for EE’s at all pay levels w/o integrating pension and disability income plans in some fashion w/ benef. provided by SS.
• communication and admin. difficulties assoc. w/ integ. plans are such that integration is not desirable

Question 13

1. the need for contrib. flexibility
2. ER’s willingness to assume costs assoc. w/ future inflation
3. need for a cost-efficient retirement program
4. desire to max. benef. adn contrib. w/in limits permitted by fed’l tax law

Answer 13

(4) objs. concerning costs of retirement plans

Question 14

(6) ways for ERs to achieve max. tax adv. for retirement programs

Answer 14

1. choice of benef. formula
2. degree to which the plan is integrated w/ SS benefs.
3. level of funding needed
4. funding instrument chosen
5. adoption of both a DB and DC plan
6. use of a target benef. plan

Question 15

sources of benefits for a retired EE

Answer 15

• ER’s retirement plan (primary source)
• SS
• Suppl. retirement income
• ER’s group life ins. and medical expense plan
• *looking at these plans integrated as a whole can affect the choice of specific benefs. and benef. levels

Question 16

establishing income-replacement objs. for retirement plans that are less than 100% of full preretirement gross income

Answer 16

addit’l sources of income:

• SS benefs.
• EE’s personal savings
• ER-provided suppl. profit-sharing 401K plan
• reduction in gross income w/o causing a signif. reduction in retiree’s standare of living

Question 17

Why does a EE’s aggregate tax pmt decrease after retirement?

Answer 17

• retiree isn’t paying SS tax (if not earning)
• SS benefs. are income tax free
• standard ded. for fed’l taxes is incr’d for over 65ers
• retirement income is not subject to state or local taxes in many jurisdictions

Question 18

profit-sharing plans and plans that involve ownership of ER securities = improve productivity

Answer 18

retirement plans can provide EE incentives

Question 19

profit-sharing plans, 401K plans w/ ER stock and ESOPs allow EE’s to acquire an ownership interest in the firm.
-if all or part of an EE’s acct is invested in ER securities, the EE is aware of progress of the comp. and the importance of achieving satisfactory profit results

Answer 19

retirement plans can provide corp. identification