Fin 430- Exam 2

Front 1

16. 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?

A. $375,000,000

B. $310,945,678

C. $250,939,524

D. $202,345,555

E. $198,466,231

Back 1

C. $250,939,524

25,000,000 x PVIFA (5.50%, 15 yrs) = 250,939,524

Front 2

17. Private pension funds are funds administered by

I. the federal government

II. state and local governments

III. insurance companies

IV. banks and mutual funds

A. I and II only

B. II and III only

C. III and IV only

D. II, III, and IV only

E. I and III only

Back 2

C. III and IV only

Front 3

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

basis?

A. Defined contribution plan invested in fixed income securities

B. Defined contribution plan invested in equities

C. Final pay defined benefit plan

D. Career average defined benefit plan

E. Overfunded defined benefit plan

Back 3

B. Defined contribution plan invested in equities

Front 4

19. In recent years defined contribution plans have grown faster than defined benefit plans in which of the

following areas?

I. Fund assets

II. Number of funds

III. Number of plan participants

A. I only

B. I and II only

C. II and III only

D. I, II, and III

E. II only

Back 4

D. I, II, and III

Front 5

20. 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?

A. $160,000

B. $145,444

C. $114,286

D. $101,104

E. $98,976

Back 5

C. $114,286

($4000 * 40)/(0.035 * 40) = $114,286

Front 6

21. 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?

A. 1.33 times as many years

B. 0.75 times as many years

C. 1.19 times as many years

D. 2.40 times as many years

E. 1.50 times as many years

Back 6

C. 1.19 times as many years

(0.0375 * 95,000)/3,000 = 1.19

Front 7

22. An employee who has worked for his firm for 30 years can retire right now and receive a constant annual

benefit of $45,000. He has a final pay plan that pays his average salary over his final 5 years times 2%

times years of service. He has decided he will keep working five more years but only if by doing so

his retirement benefits will grow at 6% per year. How much would his expected average salary (to the

nearest dollar) have to be over the next 5 years to keep him working?

A. $54,198

B. $86,029

C. $51,617

D. $66,911

E. $53,147

Back 7

B. $86,029

(45,000 x (1.06^5) )/(0.02*35) = 86,029

Front 8

23. The main advantage of a profit sharing Keogh plan over a money-sharing Keogh plan is that profit

sharing plans

A. are eligible for PBGC insurance and money sharing plans are not.

B. have higher maximum contributions than money sharing plans.

C.can have contributions that vary from year to year with profits, while money-sharing plan contributions

are fixed.

D. both A and B are advantages

E. none of the above

Back 8

C. can have contributions that vary from year to year with profits, while money-sharing plan contributions

are fixed.

Front 9

24. The Pension Protection Act of 2006 requires companies to correct funding shortfalls in their defined

benefit plans within:

A. 1 year

B. 3 years

C. 5 years

D. 10 years

E. 20 years

Back 9

C. 5 years

It was 20 years before the law went into effect.

Front 10

25. Under ERISA, pension fund managers are required to invest fund assets as wisely as if they were

investing their own money. This requirement is called the

A. owl rule.

B. vesting requirement.

C. 403(b) requirement.

D. prudent person rule.

E. funding rule.

Back 10

D. prudent person rule.

Front 11

26. 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

Back 11

E. defined contribution

Front 12

27. 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.

A. I, IV, and V only

B. I, II, and V only

C. II and III only

D. II, III, and IV only

E. all are true

Back 12

D. II, III, and IV only

Front 13

28. 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%

Back 13

D. 93.52%

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%

Front 14

29. 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?

A. 3.3 years

B. 9.7 years

C. 4.6 years

D. 2.4 years

E. 12.2 years

Back 14

C. 4.6 years

rate of return = (15%x0.5) + (8%x0.3) + (6%x0.2) = 11.10%;

1,000,000/15,000 = FVIFA (11.10%,N); solve for N with financial calculator or use log rule and annuity formula.

Front 15

30. 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.

A. I, II, IV

B. I, II, IV, and V

C. I, III, and V

D. II, IV, and V

E. III, IV, and V

Back 15

C. I, III, and V

Front 16

31. 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.

A. I, II, and IV

B. II, IV, and V

C. I, III, and IV

D. II only

E. V only

Back 16

D. II only

Front 17

32. A retirement account specifically designed for self-employed persons is a

A. Roth IRA

B. traditional IRA

C. Keogh

D. Penny Benny

E. public pension plan

Back 17

C. Keogh

Front 18

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

A. 3

B. 5

C. 8

D. 10

E. 15

Back 18

D. 10

Front 19

34. ERISA established all but which one of the following?

A. Prudent man rule

B. Maximum vesting times

C. Minimum funding requirements

D. Insurance for pension plan participants

E. Minimum payouts for defined contribution plans

Back 19

E. Minimum payouts for defined contribution plans

Front 20

35. 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.

A. I only

B. II only

C. I and III only

D. II and III only

E. I, II, and III

Back 20

A. I only

Front 21

36. A defined benefit pension plan has expected payouts of $15 million per year for 8 years and then

$20 million over the following 15 years. Actuaries have estimated that the fund can be expected to

earn an average of 5.25% on its assets. The fund currently has reserves of $185,475,000. The plan is

___________ by about ___________ million.

A. underfunded; $100

B. underfunded; $59

C. overfunded; $30

D. overfunded; $24

E. underfunded; $46

Back 21

E. underfunded; $46

185.475M - [15M x PVIFA (5.25%, 8) + 20M x PVIFA (5.25%, 15)/PVIF (5.25%, 10)] = -46M

Front 22

37. 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?

A. $195,369

B. $213,133

C. $244,667

D. $289,055

E. $309,613

Back 22

E. $309,613

[(6% x 75,000) + 1,900] x PVIFA (8.50%, 20) = 309,613

Front 23

38. Employee plus employer contributions to a 401(k) are $11,000 per year. Equity funds are earning 10%,

bond funds 5%, and money market funds 3%. The employee will retire in 30 years. How much money

will he have if he earns the average return from putting 65% of his money in equities, 30% in bond funds,

and the rest in money market funds?

A. $1,280,925

B. $1,838,526

C. $1,654,320

D. $1,978,565

E. $1,248,550

Back 23

A. $1,280,925

r = (65% * 10) + (30% * 5) + (5% * 3) = 8.15%;

FV30 = 11,000 * FVIFA (8.15%, 30) = 1,280,925

Front 24

39. You want to have $1,200,000 when you retire and you are in a defined contribution plan. You can earn

9% per year on the money invested and you will retire in 25 years. Your employer also contributes to

your plan. The employer will contribute 4% of what you put into the plan each year. How much do you

have to contribute per year to meet your goal?

A. $18,435.43

B. $17,654.87

C. $16,879.32

D. $13,622.60

E. $15,999.44

Back 24

D. $13,622.60

1,200,000/FVIFA (9%, 25 years) = $14,167.50 total annual payment required.

Your contribution must be 14,167.50/1.04 = $13,622.60

Front 25

40. Vesting refers to

A. how long until an employee owns any employer contributions to the employee's pension plan.

B. how long until an employee can transfer any of their own contributions to a new plan if they switch

jobs.

C. eligibility requirements to retire early.

D. restrictions on asset allocations within a defined contribution plan.

E. the extent to which an employee materially participated in a given business in a given year.

Back 25

A. how long until an employee owns any employer contributions to the employee's pension plan.

Front 26

41. IRAs are

A. self-directed investment vehicles designed to provide supplemental retirement income.

B. corporate retirement plans for self-employed individuals and small businesses.

C. specific classes of investments such as equities or bonds issued by certain corporations.

D. investment vehicles created by ERISA.

E. special types of life insurance policies.

Back 26

A. self-directed investment vehicles designed to provide supplemental retirement income.

Front 27

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

A. Sweden

B. Italy

C. Great Britain

D. Chile

E. France

Back 27

E. France

Front 28

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

A. 1990

B. 1995

C. 2000

D. 2005

E. 2010

Back 28

B. 1995