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FIN 612 Chapter : Chapter 4

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taupeotter260
20 Apr 2015
School
Ryerson University
Department
Finance
Course
FIN 612
Professor
Allen Goss

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Document Summary

Two types of rpps: defined contribution pension plan, defined benefit pension plan, defined contribution pension plan (dcpp) defines the contribution levels for the employer and the employees but not the level of pension received at retirement, in a dcpp employees take the investment risk, dcpp covers both, a money purchase plan (mpp), whose contribution rates are defined. More commonly known as a dcpp: a deferred profit sharing plan (dpsp), whose contributions are based on profits, defined benefit pension plan (dbpp) specifies the amount of the pension benefit using a definite formula that is typically based on the number of years of service as well as being related to earnings during the last few years of employment, employers take the investment risk, most private sector plans are defined contribution plans, most public sector plans are defined benefit plans, there are more members in defined benefit plans, ontario teachers pension plan board largest rpp.

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Related Questions

1. Which of the following statements about defined contribution plans is incorrect?


a. In general, employees can choose the investment vehicle under a defined contribution plan. Thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.


b. In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.


c. Defined benefit plans are used more often by large corporations than by small companies.


d. The PBGC insures a portion of pension benefits.


e. A defined contribution plan places the risk of poor pension portfolio performance on the employee.



2. Which of the following statements about pension plan portfolio performance is incorrect?


a. Alpha analysis, which relies on the Capital Asset Pricing Model, considers the risk of the portfolio when measuring performance.


b. Peer comparison examines the relative performance of portfolio managers with similar investment objectives.


c. A portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.


d. In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.


e. Pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.



3. Ms. Lloyd, who is 25 and expects to retire at age 60, has just been hired by the Chambers Corporation. Ms. Lloyd's current salary is $30,000 per year, but her wages are expected to increase by 5 percent annually over the next 35 years. Chambers has a defined benefit pension plan in which workers receive 2 percent of their final year's wages for each year of employment. Assume a world of certainty. Further, assume that all payments occur at year-end. What is Ms. Lloyd's expected annual retirement benefit, rounded to the nearest thousands of dollars?


a. $35,000


b. $57,000


c. $89,000


d. $116,000


e. $132,000

Question 1

  1. Life insurance is viewed as favorable in defined benefit plans because it adds to the limit on deductible contributions

    True

    False

2 points

Question 2

  1. Some of the advantages of using life insurance in a qualified plan includethe following except:

    plan costs for employer are predictable

    life insurance is considered to be a very safe investmen

    greater rates of return on insurance cash value than alternative investments

    retirement benefits can be guaranteed by both the insurance company and employer

    low cost installation and service of the plan

2 points

Question 3

  1. A defined benefit plan can help an older employee in a small business maximize tax-deferred savings.

    True

    False

2 points

Question 4

  1. IRS sets a maximum limit on the projected annual benefit that a defined benefit plan can provide a participant.

    True

    False

2 points

Question 5

  1. An employee can be covered under both a defined benefit and a defined contribution plan.

    True

    False

2 points

Question 6

  1. Which type of plan has benefit levels that are guaranteed by the employer and also the Pension Benefit Guaranty Corporation (PBGC)?

    money purchase plan

    defined benefit plan

    target benefit plan

    cross tested plan

    tax deferred annuity

2 points

Question 7

  1. Regarding a cash balance plan, which of the following is (are) true?

    the employee bears investment risk

    each participant has a hypothetical account that the employer credits at least annually

    the plan benefits older workers more than younger workers

    1 and 3

    2 and 3

2 points

Question 8

  1. A traditional defined benefit plan and a cash balance plan share the following characteristics:

    Pension Benefit Guaranty Corporation coverage

    employer bears investment risk

    able to use Social Security integration

    all of these

    only 1 and 2

2 points

Question 9

  1. If an employer wants to reward an employee

Hi, Please help me to solve these questions with detailexplanation . Thanks

Question 4
Dustin, who is 48 years old, works for Pinnacle Inc., with a salaryof $300,000, a car allowance, and a very nice expense account.Pinnacle is a Fortune 1,000 company that sponsors a defined benefitplan that pays 2 percent times years of participation times theaverage of the three final years of compensation. In addition,Pinnacle sponsors a 401(k) / profit sharing plan and contributes18% of employees salary to the profit sharing plan. There is noadditional match. If the ADP of the NHCEs is 3%, what is themaximum that Dustin can defer this year (2018)?
A.

$5,500.
B.

$13,750.
C.

$15,000.
D.

$18,500.

Question 5
Larry, age 55, is employed by BB Trucking Company as a tire repairspecialist. He earns $62,000 per year and received an allocation of$40,000 to his employer-provided profit sharing plan for the year.If BB Trucking does not match employee deferrals, what is themaximum amount Larry can defer to his 401(k) plan for the 2018 planyear?
A.

$15,000
B.

$18,500
C.

$21,000
D.

$24,500

Question 6
Jacques, who is age 45, has just resigned from his current job. Heworked for Ace, which sponsors a cash balance plan and a standard401(k) plan. Each of the plans uses the longest permitted vestingschedule and both plans are top heavy. He has a balance of $40,000in the cash balance plan, has deferred $20,000 into the 401(k) planand has employer matching contributions of $10,000. If he has beenemployed for three years, but only participating in the plans forthe last two years, how much does he keep if he leaves today?
A.

$ 20,000.
B.

$30,000.
C.

$60,000.
D.

$64,000.

Question 7
Mikael opened a fabulous restaurant ten years ago. The food is soexceptional that the restaurant has become one of the top spots inthe city. Mikael, age 55, is the sole owner with compensation of275,000. Mikael’s son Jamel, age 28, is the master chef withcompensation of $100,000. Jamel has been with the restaurant fulltime since he turned 18. Mikael also employs 15 other individualswhose ages range between 25 and 35 and have compensation on averageof $40,000 per year. Mikael wants to establish a profit sharingplan. Which of the following statements is true?
A.

If Mikael selected the standard allocation method and the plancontributes 10 percent per individual, the plan will contribute$55,000 to Mikael’s account.
B.

If Mikael selected the permitted disparity method and the plancontributes 10 percent per individual, the contribution the companymakes for Mikael will be increased.
C.

Considering the needs and wants of Mikael and Jamel, anage-based profit sharing plan is the best plan for both ofthem.
D.

A new comparability plan is the least expensive, simplest way tomeet both Mikael and Jamel’s retirement needs.
Question 8

Which of the following statements regarding an age-based profitsharing plan is correct?
A.

An age-based profit sharing plan provides a greater benefit tothose plan participants whose earnings exceed the Social Securitywage base and who are over fifty years old.
B.

An age-based profit sharing plan only provides a benefit tothose plan participants whose age is within 10 years of the age ofthe owner of the plan sponsor.
C.

An age-based profit sharing plan provides greater benefits tothe older plan participants.
D.

Younger plan participants in an age-based profit sharing planusually receive the majority of the profit sharing planallocation.

Question 9 :
Acme Inc., is establishing a retirement plan and they want a planthat includes a Roth account. Which of the following statements iscorrect about Roth accounts?
A.

Matching contributions can be contributed to Roth account.


B.

Amounts in a traditional 401(k) plan cannot be rolled over to aRoth account.
C.

Roth accounts do not require minimum distributions until afterthe death of the participant.


D.

Roth accounts permit access for taxpayers who may otherwise notbe able to contribute to a Roth IRA.

Question 10
Which of the following qualified plans would allocate a higherpercentage of the plan’s current contributions to a certain classor group of eligible employees?

A profit sharing plan that uses permitteddisparity.
An age-based profit sharing plan.
A defined benefit pension plan.
A target benefit pension plan.

A.

1 only
B.

1 and 3
C.

2 and 4
D.

1, 2, 3, and 4