- Which is preferable from an employee’s point of view: a defined contribution or a defined benefit pension plan? Explain your answer.
- Henry Wooster meets with the employee benefits manager to
discuss enrolling in the company’s 401(k) plan. He finds that if he
enrolls, he must choose the amount of salary to defer and also
direct his fund investment. Having no college education and no
business experience, Henry lacks confidence about making these
- Should Henry enroll in the 401(k) plan? Do the advantages outweigh the difficulties he may have in managing the plan?
- What would you recommend that Henry do to educate himself about fund management? How can the benefits manager help?
- Is it appropriate for the employer to establish a plan that requires employees to take so much responsibility for retirement planning? Explain your answer.
- As an employee benefits manager, you must recommend to the firm’s CEO a defined contribution plan to add to the existing defined benefit retirement plan. First, describe a hypothetical firm, giving the size of the firm, its profitability, and the stability of its work force. Then explain your choice of a deferred profit-sharing plan, a 401(k), a money purchase plan, or some combination of these.
- The law firm of Dunham, Chapman, & Hart has five employees.
Following is information regarding these employees:
Employee Age Salary Position Dunham 57 $240,000 Partner Chapman 34 $180,000 Partner Hart 58 $110,000 Partner Perez 38 $60,000 Associate McCall 27 $40,000 Paralegal
The partners talked to Rollings Benefits Consultants about the best-qualified pension plan for the firm in light of their major success in and anticipated growth in profits in the coming years. Rollings Benefits created a presentation of a possible plan that showed the maximum possible contributions for the highly paid employees (the partners). Under this proposal, what qualified plan do you think Rollings Consultants suggested to Dunham, Chapman, & Hart? The objective is to give highly paid employees the highest possible contributions. Explain the proposal.
- Cash balance plans have become increasingly popular in recent years. Why do employers like cash balance plans relative to other types of defined benefit plans?
- The VA Regional Bank employs 5,300 full-time employees. It is a
privately owned corporation that was established in 1972 and has
been very successful, despite the recession, because of the
conservative investments of the owners. All employees work at least
thirty hours a week. The management team has expanded and now
includes 830 highly compensated employees. The VA Regional Bank has
had an established traditional integrated defined benefit plan for
the past twenty years. Despite its major success, management
decided to follow the lead of converting traditional defined
benefit plans to cash balance plans. There are many good reasons to
do so, but management is worried about the impact on some segments
of its work force. In a survey they conducted, they saw a high
level of resistance by many employees. The case has been a topic of
much discussion in the media and in Congress, and it is under the
jurisdiction of the 2006 Pension Protection Act. Respond to the
- Design the formula for the traditional integrated defined benefit plan that you think the company currently provides based on what you learned in this chapter.
- Design the formula for the cash balance plan that you think the company is contemplating for its employees.
- Who benefits most from each of these plans? Compare your answers in (a) and (b). Why do you think so many employees expressed resistance to the possibility of a cash balance plan?
- What are the ramifications of terminating a defined benefits pension plan? (Refer to the box, “Cash Balance Conversions: Who Gets Hurt?” and the PBGC Web site.)
- The following table shows the five employees of the law firm of
Tayka, Mooney & Ruhn, plus some information about each.
Employee Age Salary Position Tayka 37 $210,000 Partner Mooney 34 $160,000 Partner Ruhn 28 $110,000 Partner Davies 38 $60,000 Associate Edmundsen 27 $40,000 Paralegal
- Rollings Consultants explain to the owners of Tayka, Mooney & Ruhn the problems that may occur with 401(k) plans. They show an example of how the company can fail the ADP test and how highly paid employees would not be able to take all the deductions they want. Pretend you are the Rollings consultant. Show such an example and give the firm some methods to overcome this problem. Use the table above to calculate an example and explain your answer.
- If the company decides to start a profit-sharing plan with $35,000 the first year, how much will be allocated to each employee?
- The Children Dentistry Place is a successful fifteen-year-old
professional firm with five employees. Following is information
regarding these employees (note their ages):
Employees Age Salary Years of Service Position Marie 55 $320,000 15 Part owner Stan 55 $220,000 15 Part owner Dan 35 $70,000 5 Assistant Elli 30 $70,000 13 Assistant Shannon 50 $60,000 12 Office manager
The firm is interested in establishing a defined contribution pension plan. Because the business is doing so well, the top employees want to maximize the contribution for themselves but not for the other employees.
- Given the age of the top employees, what defined contribution pension plan would you suggest?
- Using the plan you think will work best for them, show the contribution for each employee. Explain your answer.
- What types of loans and distributions are permitted under the plan you designed?
- Describe ERISA requirements regarding survivors.
- Prepare a matrix comparing the differences among the
- IRA and Roth IRA
- 401(k) and ESOP
- 403(b) or 457 (select one of the two plans)
- SEP or SIMPLE plans (select one of the two plans)
Make sure to include the following:
- Who or what organizations should use each plan? What are the limitations?
- What are the unique characteristics of each plan?
- Who is eligible?
- What are the provisions for loans and distributions?
- Jackson Appliances has twelve employees. The owner, Zena Jackson, is considering some system to reward them for their loyalty and to provide some funds to help them with their living expenses after they retire. Explain why a SEP might be a good choice for the company and explain how it works. Are there other alternatives Zena should consider?
- What is the primary way in which a single premium deferred annuity differs from a flexible premium deferred annuity? How might the typical motivations for purchase differ for investors in these two types of annuities?