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Exam 18: Pension Funds

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Question 21

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An employee contributes 9% of his salary to his 401(k) plan and the employer matches with 40% of the first 6% of the employee's salary. The employee earns $90,000 and is in a 28% tax bracket. If the employee earns 10% on the plan investments, what is his one-year rate of return relative to the net amount of money he invested?

A) 16.28%
B) 51.25%
C) 90.07%
D) 93.52%
E) 29.72% FV1 = 90,000 x (9% + (.4 x .06) ) x 1.10 = 11,286; Employee after-tax contribution = 90,000 x (9% x (1-28%) ) = 5,832; HPR = (11,286/5,832) - 1 = 93.52%

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Question 22

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Why do employees increasingly prefer defined contribution plans to defined benefit plans?

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Employees like the chance to manage thei...

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Question 23

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In a defined benefit plan, the retirement benefit will vary according to rates of return on pension fund reserves.

A pension plan has promised to pay out $25 million per year over the next 15 years to its employees. Actuaries estimate the rate of return on the fund's assets will be 5.50%. What amount of pension fund reserves (to the nearest dollar) are needed for the plan to be fully funded?

ERISA established all but which one of the following?

Congratulations, you have just been employed! You now have a choice between a flat benefit at retirement equal to $4,000 times your years of service, or a career average formula of 3.50% of your average salary times your years of service. You expect to work 40 years. At what average salary would you be indifferent between the two alternatives?

Assets in 401(k) plans are now greater than assets in private defined benefit plans.

Which of the following statements about 401(k) plans are true? I. They are defined benefit plans. II. They allow employer and employee contributions. III. Earnings accrue tax-free during the employee's working years. IV. They allow employee discretion in asset allocation. V. They always have minimum guaranteed rates of return.

Under ERISA the maximum time period allowed for vesting is _____________ years.

A country where the link between public pension benefits and amounts paid in is weak is

Private pension funds are funds administered by I. the federal government II. state and local governments III. insurance companies IV. banks and mutual funds

Pension contributions paid to insured pension funds and the assets purchased with these funds become the legal property of the insurance company and are not the legal property of the individual pension fund contributors.

At your new job you estimate that your average salary over your working years will be $95,000 per year. How many more years would you have to work to receive as much benefit from a flat benefit of $3,000 times years of service as you would receive from 3.75% of your average salary times years of service?

Most state and local pension funds are unfunded.

The PBGC I. insures participants of defined benefit plans if plan funds are insufficient to meet contractual pension obligations. II. insures participants of defined contribution plans if investment returns are insufficient to meet expected pension obligations. III. regulates day-to-day pension fund operations.

Noninsured pension plans generally invest in riskier assets than insured pension plans.

The Pension Protection Act of 2006 requires companies to correct funding shortfalls in their defined benefit plans within:

Employee plus employer contributions to a 401(k) are $15,000 per year. Equity funds are earning 15%, bond funds 8%, and money market funds 6%. The employee wants to retire as soon as possible with $1 million in retirement assets. If he puts 50% of his money in stocks, 30% in bonds, and 20% in money funds, how long until he can expect to retire?

Why do insured pension plans invest in less risky assets than uninsured pension plans?

An individual is considering contributing $4,000 per year to either a traditional or a Roth IRA. Payments would begin in one year. If she uses the traditional IRA, her contributions would be fully deductible. She is 40 years old and is in a 28% tax bracket. On either IRA she can earn 7%. When she retires at age 65 she believes she will be in a 28% tax bracket. Which type of IRA should she choose if she invests not only the $4,000 per year, but any tax savings due to the deductibility of her contributions in a taxable investment earning a pretax rate of 7%? She will withdraw all her money upon retirement and may owe taxes then, depending on the type of IRA chosen.