Assignment 6 - Defined Benefit Overview 1

Question 1

A DB plan that is integrated w/ SS through a formula that subtracts some amount from the gross plan benef. based on the SS benefit.

• focus on total benef. from plan and from SS
• start w/ calc. of benef. from plan, then reduce plan by as assumpt. of SS benef. up to 50%
• calc. is NOT based on real SS benef amt
• Max. YoS that can be included in calc. = 35

Answer 1

offset plan

Question 2

The point at which EEs would receive full benefits from a DB plan - no later than age 65 or the 5th yr of partic. in plan

• 65 is most common
• ERISA limit = later of age 65 or 5 years of plan partic.
• could be younger age

Answer 2

normal retirement age

Question 3

• type of plan that bases benef. on earnings avg’d over an EE’s entire career
• give EE same benef. if EE moves around from copmany to company each having the same type of plan
• no reflection of inflation
• ER will update formulas to reflect inflation
• EE has less confidence in this because of ER control (and not being automatic)

Answer 3

career pay plan

career avg plan

Question 4

• DB formula that is based on the avg of the final 3 or 5 years of pay
• designed to reflect inflation prior to retirement by only using recent pay
• cost bourne to ER

Answer 4

Final Pay Plan

Final Avg Plan

Question 5

basic formula provides a flat benef. unrelated to an EE’s earnings or service

1. simplest
2. same amt to all, regardless of service, age, or earnings - not tied to current pay
3. often used w/ another plan
4. may require a long length of service to receive this benef.
5. usually tied to unions; amt is only incr’d by union agreements

Answer 5

flat amount formula

(for calc. DB benefts)

Question 6

**DB plan that varies the amts to reflect the inv. results of an underlying fund of common stocks (stock mvmnt should mirror inflation)

**bases benef. on final avg pay adn the %age credits a partic. receives each yr.

• might be variable annuity or tied to stock portf.
• affect only portion of benef.
• cost controlled by ER
• risk shifted to EE
• complicated
• mvmnts don’t always mirror inflation

Answer 6

equity pension plan

Question 7

Advantages for EE Contrib to DB plans

Answer 7

• EEs are responsible for their retirement
• Smaller ER contrib. are needed for same benef.
• Same ER contrib. would give greater benef.
• avoids somethign for nothing
• encourages saving

Question 8

Disadv. of EE Contribs.

Answer 8

• AT dollars from EE = dollar for dollar get less benef. than w/ ER funds
• ER may need to raise salaries so EEs can afford to contrib.
• Partic. issues
• plan qualif.
• EEs being able to retire
• recordkeeping

Question 9

1. reduced benef. (usually)
2. full benefit if: Combo of years and service equal 90; age 55 + 10 years (examples)
3. Options in calculating reduction in benef:

• pro-rata
• present value
• set formula

Answer 9

Early Retirement Benefit

Question 10

Benefit Structures = how much do participants get

2 major factors: Length of service

                        Salary/earnings (comp)

Question 11

PROS of Final Average Pay

Answer 11

• ties benef. to standard of living at retirement
• keeps pace w/ pre-retirement inflation
• more favorable results for key EEs
• easier to track

Question 12

CONS of Final Average Pay

Answer 12

• more expensive
• can’t reduce benefits from highest retirement benefit earned

Question 13

provides benef. related to EE’s earnings

nonautomatic adjustment for post-retirement inflation

1. simple
2. set % of pay, regardless of service
3. may use career avg or final avg (mostly final avg)
4. may require certain amount of service by NRA
5. doesn’t reflect YoS

Answer 13

Flat Percentage of Earnings formula

(for calc. DB benefts)

Question 14

relfects EE’s service but not earnings

nonautomatic adjustment for post-retirement inflation

1. simple
2. values service over earnings
3. $X times years of service
4. Requires 1,800 - 2,000 hrs to get full value

Answer 14

Flat Amt per YoS formula

flat dollar

(for calc. DB benefts)

Question 15

reflects both an EE’s earnings and service

nonautomatic adjustment for post-retirement inflation

1. occasionally tied to CPI
2. unit cred (or past and future service)
3. often 1% or 1/25% of pay per year of service
4. can be used with both career avg or final avg (works best with career avg pay plan)

Answer 15

Percentage of earnings per YoS (Unit credit formula)

(for calc. DB benefts)

Question 16

2 formulas for SS Integration w/ DB plans

Answer 16

1. Excess Method
2. Offset method

Question 17

*type of formula used for SS integration

*higher rate on pay above integration level

• focus is on earnings and wage base
• can set excess level at SS wage base or below
• %age rate applid to pay over integration level CAN’T be greater than 0.75% more than base %age
• if base %age is less than 0.75%, excess %age CAN’T be more than twice base %age

Answer 17

Excess Method

Question 18

Death Benefits for DB plans

Answer 18

• optional
• if Life Ins. is used to fund plan - any easy structure for pmt
• can be cash distrib. from plan assets
• payable before or after retirement

Question 19

• if vested partic. dies prior to retirement, there has to be a benefit payable to the spouse
• with a death benefit on DB plan
• req’d for all pension plans
• any any of these is added to any other death benef. to dtermine if the total death benef. exceeds 100 x monthly benef.

Answer 19

Qualif’d Preretirement Survivor Annuity (QPSA)

Question 20

Disability Benefits

w/ DB Plans

Answer 20

• generally self-insured (in some form paid from plan assets)
• made avail. to fully vested partic.
• treat it as early retirement w/ certain level of service
• may integrate w/ SS or worker’s comp benef.
• EE may continue to accumulate pensions credits during LTD

Question 21

Post-Retirement Inflation

(types of formulas)

Answer 21

1. Equity Pension - tied to variable annuity or stk portf.
2. Cost of Living formulas - tied to CPI
3. Wage-related formulas - tied to designated wage index
4. Specified Percentage - set specific %age each year
5. Nonautomatic adjmnts - ER controls adjmnts

Question 22

a formula in a DB plan that provides a different benef. rate for comp below the SS wage base than the comp ove the SS wage base

both DC and DB plans have it

Answer 22

Excess Integration Formula

Question 23

DB plan formula for integration w/ SS is based on the indiv’s SS benef.

only DB plans have this

Answer 23

Offset Integration Formula

Question 24

DB formulas

Answer 24

1. flat $ amt
2. flat %age of pay
3. flat amt per YoS
4. %age of comp per YoS

Question 25

(2) types of benefit formulas for retirement programs

Answer 25

1. DC or money purch. formula 2. DB or annuity purchse formula

Question 26

* type of benefit formula used for retirement program * contrib. rates are fixed * EE's benef. varies depending upong amt of contrib., inv. earnings on assets, EE's entry age and retirement age

Answer 26

DC or money purch. formula

Question 27

* type of benefit formula used for retirement program * DB is estab'd for each EE * contribs are determined to be whatever is necessary to produce the DB reuslts * may be subdivided into different types

Answer 27

DB or annuity purch. formula

Question 28

purpose of variable benef. plans

Answer 28

protect against the effects of inlation on a retired employees pension benef. attempts to adjust benef. to keep an EE's purch'g power level (2) general forms: 1. varies to reflect chgs in value of specific portf. of common stks and similar inv. 2. varies to reflect chgs in a recognized cost-of-living index (exp. Burear of Labor Stats)