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51 Cards in this Set

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What are environmental considerations when designing a plan?
Legal status
Operations (divesified, unions, geographies, transfers, locations, labor demands)
Characteristics of EE/ER/industry/comunity
Change in demographics
What are other considerations when designing a plan?
Business structure (young/mature, cyclical/competitive)
Profits (wide/narrow margin, stable/volatile)
Need for employees
Need for short-term or long-term cash
What philosophies dictate plan design?
Human Resource strategy
Compensation strategy
Benefits strategy
What cost philosophies influence plan design?
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?
What plan features influence plan design?
Type desired (DB/DC/Hybrid)
Same benefit for all? Execs?
Coordinate/Integrate with SS?
What is goal of SS integration?
Provide adequate benefit after a full career avoiding excessive benefits. Allow employer to take advantage of contribution to SS/Medicare.
What are the barriers to SS integration?
SS and ER often use different definitions of pay, service crediting, and retirement age.
How does a retiree medical plan coordinate with SS?
coordination (min %C, C-M)
exclusion (%*(C-M))
carveout (%C - M)
What objectives should be considered when designing a plan?
Legal compliance
Efficiency of design
Replacement ratio
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
What plan features should be considered when designing a plan?
Service (CS/VS/Elig)
Benefit Formula
Inflation protection
Retirement Ages
Forms of payment
Employee contributions
Effect of features on retirement pattern
What are the key governance issues to manage risk within Benefit Policy?
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.
How can risk be managed within the Benefit Policy?
Least severe to most severe:
amend/change plan design
freeze plan
purchase annuities
How is the replacement ratio determined?
[Gross(pre)-Tax(pre)+Tax(post)-Savings+/- Expenses]
divided by
What variables impact replacement ratio?
Retirement Age
Annuity/LS option
Return on Investments
Marital Status
What are the different plan types?
What are DB formulas?
Flat Benefit
Career Average Plan
Final Average Pay Plan
What are advantages of DB formulas?
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
What are the disadvantages of DB formulas?
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
What types of inflation increases?
Cost of Living
Wage related

Not Automatic
Fixed %
Fixed $
What are advantages of equity cost increase?
Fluctuates with general level of economy
Investment risk shifts to EE
Cost more predictable if linked to asset performance
Other benefit needs may decrease
What are disadvantages of equity cost increase?
Downturn not endured by fixed income EEs
Inappropriate in amount/timing
Cost of other benefits may increase
EE communication difficult
What are advantages of cost of living increase?
Little criticism
Easy to understand
What are disadvantages of cost of living increase?
Vested terms may be entitled
Actives also want increase
Standard of living may not be reflected
Index may overstate inflation
Cost may be significant
What is advantage of wage related increase?
Increase in standard of living is reflected
What is advantage of specified increase?
What is disadvantage of specified increase?
May not reflect inflation.
What are advantages of non-automatice increase?
Employer gets credit
What are disadvantages of non-automatic increases?
Can't prefund
Benefit increase may be inadequate
What is non-automatic increase based on?
Change in govt benefit
Cost of other benefits
Timing of last increase
Original benefit amount
What has contributed to the shift to DC plans?
Competitive w/ controlled cost
Unionization hurdles
2-tier system
Legislation/regulations (inc SSNRA)
Tax benefits of DC
Ee preference
ER less paternalistic
Risks (demographic, economic, accounting, regulatory)
CU2Lateer (dear)
What should DC formula balance?
Balance elements of pay
Competitive w/ cost & benefit
DC message
Ee in traditional plan not disadvantaged
What are the advantages of a DC plan?
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
What are the disadvantages (risks) of a DC plan?
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
Difficult to A ICU
Other - In UIL
What are characteristics of account balances in a DC plan?
Wide variance in EE retirement benefit
Ee tend to terminate in good economy when ER goal is to retain talent
What is investment risk within DC plan?
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
What eduction should be provided to DC plan participants?
personal experiences rather than statistics
More choices are not necessarily better
What issues arise with ER stock in a DC plan?
Fiduciary duties
Administrative Issues
What are typical DC arrangements?
Money Purchase Plan
Deferred Profit Sharing Plan
Retirement Savings Plan
What is a Money Purchase Plan?
Guaranted employer contributions baed on employee contributions, fixed $ amount or fixed %
What is a deferred profit sharing plan?
ER withholds pay (profit based)
not taxable to EE
increases productivity
adds to EE/ER relationship
Money into Plan
Money to EE at Ret
What is disadvantage of deferred profit sharing plan?
Benefit is uncertain as it is tied to profits
What are characteritics of Retirement Savings Plan?
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
Guidance on:
Accumulation & spending strategies
Budgeting tools/worksheets
CORE Communication Guidance
How does the plan sponsor manage DC risks?
Group annuity quotes
Default investment & distribution options
Auto enrollment and savings increases
Lifecycle funds
What should be considered before converting from DB to DC?
Reportable events
Vesting required
NDT of DB plan
Investment policy of DB plan
Assumptions of DB plan
Cash flows in DB plan
Address DB plan UAL
Describe options available when moving from DB to DC plan
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
Why do you need less income after retirmement?
Federal taxes decrease (more deductions or less income)
FICA taxes stop
No longer saving
SS bfts are partially taxed (if at all)
What are the 3 models for determining replacement ratios?
Tax Only
Tax + Savings
Tax + Savings + Expenditure
How much lump sum is needed to retire?
Depends on:
Life expectancy
Return earned
What are the two approaches to managing a lump sum?
Purchase Annuity
Self Manage
What are the advantages/disadvantages to an annuity purchase with retirement lump sum?
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.
What are advantages/disadvantages of self-managing a lump sum?
A: Immediate access to $
Withdraw more if ROI >
Residual is death bft
Purchase annuity later
D: Less initial income
Investment risk
Outlive balance