Csp Q11

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Types of DB plans

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1) Flat Benefit Pension Plan
2) Career Average Earnings Pension Plan
3) Final Average Earnings Pension Plan
4) Flexible Pension Plans*

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What is the advantage of a flat benefit formula

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Advantage
1) May be easy to understand

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What are the advantages and disadvantages of a career benefit formula

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Advantages
1) Easy to administer and understand
2) Er cost is manageable and er can choose the timing of upgrade
3) Can update earnings base periodically
a) Employer recognized for making benefit improvements
Disadvantages
1) Not adequate for meeting retirement needs unless frequently updated
a) Does not provide pre-retirement inflation protection

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Ways to protect against preretirement inflation with a career average formula

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1) Final average pay updates are provided
2) Inflation is offset by a generous accrual percentage
3) Formula has a minimum benefit based on final average pay

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Advantages of final-pay plans

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1) Benefit keeps pace with preretirement inflation
a) Best objective for matching preretirement income
2) Favorable to key employees
3) Protects member from earnings decline

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Disadvantages of final average pay plans

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1) More expensive than career average formula
2) Costs become dramatically evident in inflationary times

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Design features paid by employees in flex plan may include

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1) Enhanced ERFs
2) Shorter final average earnings
3) Survivior benefits
4) Pre and post retirement indexing

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What are the advantages and disadvantages of a flex plan formula?

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Advantages:
1) Allows member to increase value of pension without increasing Pension Adjustment
2) Ee can custom tailor to meet their needs

Disadvantages from er perspective:
1) Administratively complex
2) Requires high level of understanding on behalf of plan members

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Types of DC plans
(1 and 2 of 2)

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1) Money Purchase Plan
- Er contributions may be:
a) Based on ee contributions
b) Fixed % of earnings
c) Fixed dollar amount
d) Specified amount per year of service or per hour work
2) Profit Sharing Pension Plan
- Allocation may be based on points
- Advantages:
1) Instills sense of partnership between er and ee
2) May lead to increased productivity
3) Er costs linked to ability to pay
4) Benefit from tax advantages
- Disadvantages
1) Benefits linked to profit which are uncertain
2) Difficult for retirement planning

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Types of Hybrid plans

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1) Max of DB and annuitized DC benefit
2) Combination Plans
3) Cash Balance Plans
Advantages
a) Provides funding flexibility because DB plan
b) Attractive for mobile workforce
c) Ee subject to little investment risk since interest accrual rate specified in plan
4) Multi-Employer Plans

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PPA: DC Vesting

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- Matching and nonelective contributions must follow the same vesting schedule
- 3-year cliff, or
- 6 year graded (20% in year 2, 40% in year 3, 60% in year 4, 80% in year 5 and 100% in year 6)

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PPA: DC Safe Harbor if Plan Contains Automatic Enrollment
(1 and 2 of 2)

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Contributions
- Deferral percentage of at least 3%; increased at least by at least 1% annually up to 6% (or until ee stops the automatic increase); sponsor may continue the automatic increases up to 10%
- The sponsor must provide matching or nonelective contributions
- Matching minimum is 100% of the first 1% and 50% of the next 5%
- Nonelective minimum is 3% of pay
Employee notification
- Must communicate have right ot opt out and to make contribution and investment elections
- Must explain how contributions will be invested if don't make an investment choice
Sponsor does not have to implement safe harbor
- if they do, then exempt from non-discrimination testing
Vesting
- Must fully vest employer contributions within 2 years

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PPA and Investment Advice for DC Members

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- Fiduciaries can provide investment advice to participants and be paid
- Sponsor has a continuing duty to prudently select and periodically review the fiduciary adviser
- But has no duty to monitor the specific advice
- Portfolio recommendations:
a) Adviser's fees can't be tied to the participant's investment choices
b) Alternatively, can use an unbiased, certified and audited computer model

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Fiduciary Responsibilities Regarding the Provision of Investment Advice per the PPA (1-4 of 4)

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1) Plan sponsor must prudently select the advice provider
- Must review and assess the provider's:
a) Qualifications
b) Quality of services offered
c) Reasonableness of fees charged
- The sponsor's review process must avoid:
a) Self-dealing
b) Conflicts of interest
c) Improper influence
- The sponsor's review process must assess the adviser's:
a) Experience and qualifications
b) Compliance with registration requirements and other securities laws
c) Assumption of fiduciary responsibility under ERISA
d) Advice is based on generally accepted investment theories
2) Plan sponsor must monitor the advice provider
a) Sponsor must note changes such as:
i) Continued compliance with securities laws
ii) Whether the advice is based on generally accepted investment theories
b) Sponsor must note:
i) Whether the investment adviser complies with T&C set with the sponsor
ii) The use of advice services by participants relative to the cost of these services
iii) Any comments and complaints about the service
c) Complaints need to be investigated
- If the complaint raises issues then sponsor may need to review the specific advice of the advisor

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PPA: DC Employer Securities and Diversification Requirements

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- Can't require the ee to invest their own contributions in employer securities
- Ee must be allowed to diversify their accumulated contributions out of employer stock immediately
- Employer can invest matching and non-elective contributions in employer's stock
- Employees must be able to diversify matching and nonelective contributions out of stock after 3 years of service
- Employer's must offer at least three investment options other than employer stock
- Provisions don't apply to stand-alone ESOPs

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PPA: Issues to Consider Regarding DC Plans

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- Can provide employees a Roth 401(k)

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PPA: Hybrid pension plans

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- Hybrids are not inherently age discriminatory
- Hybrid plan conversions can't have wear-away
- A+B required
- Vesting is 3-year cliff
- Whipsaw eliminated
- Interest crediting rate can't exceed a market rate of return

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Why integrate private plan with the public program?

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1) Avoids excessive benefits
2) Government benefit is a floor benefit favors low paid workers
a) Employer benefit needs to be adjusted to favor more highly paid employees
3) Recognizes employer payments toward government benefit

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Integration can't provide equitable benefits to all pay levels

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1) Gov't benefit includes service throughout entire career
2) Determination of pensionable earnings under both plans may be different
3) Normal and early retirement dates may differ between the two programs
4) Law may restrict amount of integration permitted

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Types of Integration:

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1) Contribution Offset (sometimes called excess plan)
a) Appropriate for DC and DB plans
2) Benefit Offset
- Designed for DB plans
3) Indirect Methods
a) Ignore a portion of the member's covered earnings
b) Apply a level reduction to everyone's benefit based on the avg ee
c) Contract out of gov't earnings related program and provide a benefit at least as large
d) Bridge benefit

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Fundamental Issues that Need to Be Considered When Designing a Retirement Plan (1 and 2 of 2)

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1) Type of plan to offer: DB, DC or hybrid
2) Determine adequacy or level of benefit to provide
3) Tax-Effectiveness
4) Changing Demographics
5) Equity
6) Cost and Cost Sharing
7) Whether to Coordinate with Government Pension Programs
8) Human Resource Planning
9) Compensation Philosophy
10) Variations in Design for Different Groups
11) Must comply with legislation
12) Location
13) Setting objectives tailored toward specific interests of the ee and er

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Other objectives that should be considered when designing a retirement program

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1) Social obligations
2) Employee incentives
3) Corporate identification
4) Administrative convenience

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A pension's design must balance the following

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1) Members needs and goals
2) Maximum tax deductible limits
3) Economic realities
4) Minimum required benefits per legislation
5) Plan sponsor goals and constraints
6) Other legislation

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Type of plan chosen (DB, DC or hybrid) depends on objectives regarding

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1) Attractive employees
2) Maintaining employees
3) Rewarding long service employees
4) Determining how much investment risk willing to take

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Plan provisions that influence retirement patterns include

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1) NRA
2) Early retirement option
3) Early retirement subsidies
4) Benefit level

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Should review retirement program periodically to reflect changes in

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1) Workforce profiles
2) Industry competitiveness and trends
3) Legislation
4) Financial considerations
5) New benefit trends
6) Government programs
7) Impact of bargaining agreements

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When analyzing the employee needs, should consider the average characteristics of the covered group

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1) The type of work they perform
2) The length of service and average age

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Employers with diversified operations should consider the following when developing a retirement program for each operation

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- Should consider the following within each operation:
1) Cost
2) Profit margins
3) Competitive needs
4) Geographic differences
- Is the same benefit plan appropriate for each operation?
- How should transfers be treated

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Considerations regarding the uniformity of the plan formula

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- May cover one or all classes of employees in a plan
- May have different formulas for different classes if cover all employees
- Legislation doesn't prohibit benefit levels or qualifying conditions based on position or salary level within the company
- Can't discriminate by age, sex, or marital status of all ees within the same class

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Advantages of a Contributory Pension Plan

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1) Costs less for the er for a plan that provides the same benefits
2) Can be used to provide higher benefits
3) Employees will take greater interest and have a better appreciation of plan

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Advantages of a Non-Contributory Pension Plan

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1) Simpler and less expensive to administer
2) Ensures coverage of all eligible employees

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Need to consider benefits payable upon the following events

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1) Normal Retirement
2) Early Retirement
3) Postponed retirement
4) Phased Retirement

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What are the different approaches to addressing postponed retirement?

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1) Allow pension payments to commence at NRA even if employee still active (no future accruals)
2) Allow benefit to continue to accrue
3) Actuarially increase benefit

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Considerations regarding granting past service benefits

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- Typically provide when company has been in business for awhile and there are long service employees close to retirement
- Ideally past service formula is the same as the current formula, but most often not because of costs

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Disability benefit considerations

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- Need to provide clear definition of disability
- No need for disability benefit from pension if employer provided LTD insurance provides payment indefinitely
- Most LTD benefits typically stop at 65, need appropriate pension benefit after that

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Disability pension accrual options

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1) Continue pension service and waive required contributions
2) Immediately commence unreduced accrued benefit if member has no LTD benefit
- Some project benefit to NRA and paid immediately without reduction in this situation