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51 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What are environmental considerations when designing a plan?
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Legal status
Operations (divesified, unions, geographies, transfers, locations, labor demands) Characteristics of EE/ER/industry/comunity Change in demographics |
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What are other considerations when designing a plan?
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Business structure (young/mature, cyclical/competitive)
Profits (wide/narrow margin, stable/volatile) Need for employees Need for short-term or long-term cash |
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What philosophies dictate plan design?
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Human Resource strategy
Compensation strategy Benefits strategy |
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What cost philosophies influence plan design?
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Funding Method chosen
Desire level cost or target cost? Who pays for Inflation/Interest rate increases? Is there ee/er cost sharing? Is there prefunding? Is cost coordinated with other benefits? |
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What plan features influence plan design?
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Type desired (DB/DC/Hybrid)
Same benefit for all? Execs? Coordinate/Integrate with SS? |
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What is goal of SS integration?
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Provide adequate benefit after a full career avoiding excessive benefits. Allow employer to take advantage of contribution to SS/Medicare.
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What are the barriers to SS integration?
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SS and ER often use different definitions of pay, service crediting, and retirement age.
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How does a retiree medical plan coordinate with SS?
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coordination (min %C, C-M)
exclusion (%*(C-M)) carveout (%C - M) |
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What objectives should be considered when designing a plan?
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Cost
Legal compliance Efficiency of design Attraction/retention Replacement ratio Competitiveness Tax advantages Benefit Level Degree of interest/inflation protection Reward of long-service employees Administrative convenience Corporate identity Employee incentives Social obligation |
CLEAR CT Bft Level
DR ACES |
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What plan features should be considered when designing a plan?
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Service (CS/VS/Elig)
Pay/Averaging Benefit Formula Minimum Inflation protection Retirement Ages DDRT Forms of payment Integration Employee contributions Effect of features on retirement pattern |
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What are the key governance issues to manage risk within Benefit Policy?
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Plan design chosen should be appropriate for EE/ER and industry.
Communicate responsibility for savings to employee. Provide appropriate education (especially in DC plan). Carefully review/monitor ee communications and administration. |
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How can risk be managed within the Benefit Policy?
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Least severe to most severe:
amend/change plan design freeze plan purchase annuities terminate |
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How is the replacement ratio determined?
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[Gross(pre)-Tax(pre)+Tax(post)-Savings+/- Expenses]
divided by Gross(pre) |
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What variables impact replacement ratio?
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Retirement Age
Expenses Subsidies Taxes Annuity/LS option Savings Health Formula Income Return on Investments Marital Status |
RESTASH FIRM
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What are the different plan types?
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DB
DC Hybrid |
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What are DB formulas?
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Flat Benefit
Career Average Plan Final Average Pay Plan |
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What are advantages of DB formulas?
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Replacement ratio more easily met
Investment/inflation risk maintained by employer if FAP Cost focused on retirement Equitable allocation of ER cost Pre/post retirement inflation protection Integrated with SS Cost of young employee small |
RICE PIC
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What are the disadvantages of DB formulas?
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Phased retirement difficult with regulations
Risks inherent in design (subsidies) pay (ot/bonus) CAP (RR inadequate if not indexed) FAP (cost) EE contributions (cost/surplus) Overengineered means difficult communication Misunderstood/not appreciated |
PROM
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What types of inflation increases?
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Automatic:
Equity Cost of Living Wage related Specified Not Automatic Fixed % Fixed $ |
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What are advantages of equity cost increase?
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Fluctuates with general level of economy
Investment risk shifts to EE Cost more predictable if linked to asset performance Other benefit needs may decrease |
FICO
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What are disadvantages of equity cost increase?
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Downturn not endured by fixed income EEs
Inappropriate in amount/timing Cost of other benefits may increase EE communication difficult |
DICE
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What are advantages of cost of living increase?
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Predictable
Little criticism Easy to understand |
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What are disadvantages of cost of living increase?
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Vested terms may be entitled
Actives also want increase Standard of living may not be reflected Index may overstate inflation Cost may be significant |
VA SIC
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What is advantage of wage related increase?
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Increase in standard of living is reflected
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What is advantage of specified increase?
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Predictable
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What is disadvantage of specified increase?
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May not reflect inflation.
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What are advantages of non-automatice increase?
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Employer gets credit
Flexible |
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What are disadvantages of non-automatic increases?
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Can't prefund
Benefit increase may be inadequate |
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What is non-automatic increase based on?
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Cost/funding
Change in govt benefit Competitiveness CPI Cost of other benefits Timing of last increase Original benefit amount |
CCCCCTO
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What has contributed to the shift to DC plans?
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Competitive w/ controlled cost
Unionization hurdles 2-tier system Legislation/regulations (inc SSNRA) Administration/Communication Tax benefits of DC Ee preference ER less paternalistic Risks (demographic, economic, accounting, regulatory) |
CU2Lateer (dear)
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What should DC formula balance?
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Balance elements of pay
Competitive w/ cost & benefit DC message Ee in traditional plan not disadvantaged |
BCDE
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What are the advantages of a DC plan?
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Admin costs decrease if ee shares
Better appreciated by mobile EE Company identification if invested in stock and 404(c) compliant Deferred PS plan has maximum flexibility Ee contributions can be pretax |
ABCDE
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What are the disadvantages (risks) of a DC plan?
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Difficult to
Attract mid-career employees Implement phased retirement Control postponed retirement Unwind administrative mistakes Other - Inflation risk passed to EE No past service benefits UAL passed to govt/society Invest conservatively Leakage |
Difficult to A ICU
Other - In UIL |
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What are characteristics of account balances in a DC plan?
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Wide variance in EE retirement benefit
Ee tend to terminate in good economy when ER goal is to retain talent |
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What is investment risk within DC plan?
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Leave saving/investing to EE
Most not skilled in math, finance or compound interest Don't understand R/R of different investment vehicles Short-term vs long-term thinking |
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What eduction should be provided to DC plan participants?
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personal experiences rather than statistics
More choices are not necessarily better |
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What issues arise with ER stock in a DC plan?
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Fiduciary duties
Administrative Issues A&D |
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What are typical DC arrangements?
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Money Purchase Plan
Deferred Profit Sharing Plan Retirement Savings Plan |
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What is a Money Purchase Plan?
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Guaranted employer contributions baed on employee contributions, fixed $ amount or fixed %
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What is a deferred profit sharing plan?
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ER withholds pay (profit based)
not taxable to EE increases productivity adds to EE/ER relationship Money into Plan Money to EE at Ret |
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What is disadvantage of deferred profit sharing plan?
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Benefit is uncertain as it is tied to profits
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What are characteritics of Retirement Savings Plan?
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Company contribution (generous) send message that ee welfare important and increases participation
Options for investements should be limited, yet diverse Resources (HR/Benefits/$) needed are significant Education program should recognize diversity of EEs Communication provides: Generosity of ER match EE contribution can increase value Target different points in career Help understand options Advantages of compounding Timely Guidance on: Accumulation & spending strategies Budgeting tools/worksheets |
CORE Communication Guidance
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How does the plan sponsor manage DC risks?
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Group annuity quotes
Default investment & distribution options Auto enrollment and savings increases Lifecycle funds |
GDAD
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What should be considered before converting from DB to DC?
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Before:
Communications FAS88 Reportable events Vesting required After: NDT of DB plan Investment policy of DB plan Assumptions of DB plan Cash flows in DB plan Address DB plan UAL |
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Describe options available when moving from DB to DC plan
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From most to least costly:
Offer Choice between DB/DC Grandfather existing in DB DB plan for past service only Full conversion to DC plan(hard or soft freeze?) DC plan to new hires only |
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Why do you need less income after retirmement?
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Federal taxes decrease (more deductions or less income)
FICA taxes stop No longer saving SS bfts are partially taxed (if at all) |
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What are the 3 models for determining replacement ratios?
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Tax Only
Tax + Savings Tax + Savings + Expenditure |
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How much lump sum is needed to retire?
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Depends on:
Life expectancy Return earned Inflation Expenses |
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What are the two approaches to managing a lump sum?
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Purchase Annuity
Self Manage |
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What are the advantages/disadvantages to an annuity purchase with retirement lump sum?
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A: Higher initial income
Cannot outlive annuity No investment risk D: Loss of flexibility to w/d No potential for > ROI Form determines death bft Locked in to 1 insurance co. |
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What are advantages/disadvantages of self-managing a lump sum?
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A: Immediate access to $
Withdraw more if ROI > Residual is death bft Purchase annuity later D: Less initial income Investment risk Outlive balance |
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