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Exam 18: Pension Funds

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Question 1

Multiple Choice

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Social Security began running a deficit for the first time in what year?

A) 1990
B) 1995
C) 2000
D) 2005
E) 2010

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B

Question 2

Multiple Choice

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a(n. ___________ plan does not require the employer to guarantee retirement benefits nor to maintain a minimum level of pension reserves.

A) defined benefit
B) insured pension
C) corporate pension
D) uninsured pension
E) defined contribution

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Question 3

Multiple Choice

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Which of the following statements are true about a traditional IRA? I. Subject to an income limit, in 2011 a single person could contribute up to $5,000 per year of pretax income to an IRA. II. All withdrawals are tax-free. III. Earnings on the IRA account are not taxed until withdrawn. IV. You must begin withdrawals at age 59 ½. V. Withdrawal(s) can be a lump sum or installments.

An employee contributes 6% of her salary to her 401(k) plan and her employer contributes another $1,900. The employee earns $75,000 and is in a 28% tax bracket. If the employee earns 8.50% on all funds invested each year and her salary does not change, how much will she have in her account in 20 years?

What are the main provisions of ERISA?

If you are terminated before you are fully vested in an employer-sponsored plan you may not get to keep previous contributions to your pension made by your employer.

A defined benefit pension plan expects to pay out $25 million per year over the next 10 years to pensioners. The fund currently has $155 million in pension assets that are earning 10% per year. This plan is underfunded.

In general terms, which one of the following plan types is the riskiest for an employee on a year-to-year basis?

Vesting refers to

A Keogh plan is designed for self-employed individuals.

Which of the following is/are true about a Roth IRA? I. Contributions are tax deductible. II. Withdrawals after retirement are not taxed. III. You must begin withdrawals at age 70 ½. IV. Employers match contributions. V. They are only available to individuals earning less than $50,000, or households earning less than $90,000.

If you are married and you and your spouse make $160,000 total per year you are not allowed to contribute to an IRA.

A 55-year-old has just changed jobs and has a choice between a defined benefit plan [final pay] and a defined contribution plan. He will work for 10 more years. What should he consider in making his decision?

IRAs are

How do public pension plans differ in other countries? Has privatization worked overseas?

Pension plans administered by the federal government are called insured pension plans.

Suppose that a corporate defined benefit plan had decided it will keep pension fund reserves equal to the present value of expected future pension benefits to be fully funded. The plan has expected payouts of $12 million per year for 15 years and then $22 million per year for the subsequent 10 years. All payments are at year-end. At the current 5.75% rate of return on the plan's assets, the plan is currently fully funded. If the plan can increase the proportion of stock investments the fund holds and raise the expected rate of return to 8.00%, how many dollars of pension assets can be freed up by the corporation?

There are now Roth versions of 401(k) plans and 403(b) plans as well as Roth IRAs.

Of the different types of defined benefit plans, plans using the final pay method will usually produce the biggest retirement benefit to employees.

You are 30 years old and you make $110,000 per year. You calculate that you can't retire until you have accumulated a lump sum amount of $2,000,000 to live on after retirement. You contribute 6% of your salary to your 401(k) and your employer contributes 3% of your salary. You plan on investing 65% of your funds in equities on which you expect to earn an average rate of return of 10%, and the rest in bonds projected to earn 5%. If your salary does not grow, how old will you be when you can retire?