Chapter 1
DESIGNING THE RIGHT RETIREMENT PLAN
LEARNING OBJECTIVES:
A. Have a basic understanding of factors relating to retirement plan
design
B. Understand key advantages of retirement plans for employers
C. Identify major types of qualified retirement plans
D. Identify key factors affecting plan selection
REVIEW:
This chapter provides an overview of designing retirement plans. Three general
steps are discussed: gather the relevant facts, identify employer goals and
objectives, and choose plan features that promote the employer objectives.
Employer advantages are discussed, such as helping employees with retirement
saving, tax deferral for owners and highly compensated employees, helping to
recruit, reward, retain, and retire employees, encourage productivity, and
discourage collective bargaining. After a brief identification of qualified versus
nonqualified plans, the chapter focuses on qualified plans by discussing their tax
advantages. Following this, broad categories of defined contribution and defined
benefit plans are introduced. There is a brief discussion of using qualified plans
rather than cash compensation. This section is followed by a moderately in-depth
discussion of factors affecting plan selection.
CHAPTER OUTLINE:
A. Overview of the retirement plan design process
1. Step 1: Gather the relevant facts
2. Step 2: Identify employer goals and objectives
3. Choose plan features that promote the employer objectives
B. Advantages for the Employer
1
Chapter 1
C.
D.
E.
F.
G.
1. Help employees with retirement saving
2. Tax deferral for owners and highly compensated employees
3. Help recruit, reward, retain, and retire employees
4. Encourage productivity
5. Discourage collective bargaining
Qualified Versus Nonqualified Retirement Plans
Tax Advantages of Qualified Plans
1. Defined contribution plans
2. Defined benefit plans
Qualified Plan Funding Versus Cash
Factors Affecting Plan Selection
Chapter Endnotes
FEATURED TOPICS:
Advantages for employers
Types of qualified plans
Factors affecting plan selection
FIGURES:
Figure 1.1 Qualified versus nonqualified plans
Figure 1.2 Defined benefit vs. defined contribution plans
Figure 1.3 Worksheet: Qualified plan vs. private savings
Figure 1.4 Defined benefit funding
Figure 1.5 Age weighted plans
Figure 1.6 Advantages and disadvantages of alternatives with employee
participation
Figure 1.7 Elective deferral plans compared
Figure 1.8 Replacement ratios
Figure 1.9 Retirement plans: Most to least funding
Chapter 1
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 61: Types of retirement plans
A. Characteristics
B. Types of qualified plans
Topic 65: Plan selection for businesses (key factors affecting selection)
A. Owner’s personal objectives
B. Business objectives
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of factors relating to retirement plan
design
2. Understand key advantages of retirement plans for employers
3. Identify major types of qualified retirement plans
4. Identify key factors affecting plan selection
KEY WORDS:
qualified plan, nonqualified plan, defined contribution plan, defined benefit plan,
age weighted plan
DISCUSSION:
1. Discuss advantages to installing a retirement plan for the employer. Be
sure to include a discussion of the “four R’s”: help recruit, reward,
retain, and retire employees.
2. One of the factors affecting plan selection is an objective to maximize
the proportion of plan costs that benefit highly-compensated
employees. Discuss the techniques included in this section, and how
well each helps to accomplish this objective.
QUESTIONS:
1. Which of the following are compensation-related benefits of retirement plans?
(1) help recruit employees
(2) help release employees
(3) help reward employees
Chapter 1
(4) help retain employees
a.
b.
c.
d.
(1) only
(1) and (2) only
(1) (3) and (4) only
(2) (3) and (4) only
Chapter 1, p. 2
2. Which one of the following classes of employees likely do not value deferred
plan benefits?
a.
b.
c.
d.
highly compensated employees
long-term employees
older employees
transitory employees
Chapter 1, p. 5
3. Which of the following defined contribution plan types are often used to help
employers maximize benefits for older employees?
(1) fixed formula age-weighted
(2) 401(k)
(3) cross-tested
(4) stock bonus
a.
b.
c.
d.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 1, pp. 7-10
4. Which of the following plans provide the greatest immediate tax benefit for the
participating employee?
(1) Roth IRA
(2) deductible IRA
(3) non-deductible IRA
(4) 401(k)
a. (1) and (3) only
b. (2) and (4) only
Chapter 1
c. (1) (2) and (4) only
e. (2) (3) and (4) only
Chapter , p. 11
ANSWERS:
1. c
2. d
3. a
4. b