TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th Edition
College Course Materials
Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®
Associate Professor
CFP® Program Director
Personal Financial Planning Department
University of Missouri-Columbia
Please Note: Correct answers for each question are indicated in bold type. After each question,
the number of the page containing information relevant to answering the question is given. When
a calculation is necessary or the reasoning behind a given answer may be unclear, a brief
rationale for the correct answer is also given.
Part A: Retirement Planning
Defined Benefit Plans
Chapter 15: Cash Balance Pension Plan
True/False
15.1
A cash balance plan favors older workers.
15.2
A cash balance plan is not guaranteed by the Pension Benefit Guaranty Corporation.
15.3
A cash balance plan establishes a separate fund for each plan participant.
Answers:
15.1 false [p. 141]
15.2 false [p. 141]
15.3 false [p. 141]
Multiple Choice
15.4
Which of the following is a disadvantage of a cash balance plan?
a. provides relatively larger benefits for older workers, creating large disparity among
younger and older workers
b. is difficult to fund with a large number of middle income employees
c. plan shifts investment risk to employees
d. retirement benefits may be inadequate for older workers
e. plan complexity makes it hard to explain to employees
Answer: D [p. 141]
15.5
Which of the following is (are) true regarding a cash balance plan?
a.
b.
c.
d.
e.
employee bears investment risk
each participant has a hypothetical account that the employer credits at least annually
plan benefits older workers more than younger workers
a and c
b and c
Answer: B [p. 141]
15.6
A cash balance plan and a traditional defined benefit plan share which of the following
characteristics:
a.
b.
c.
d.
e.
Pension Benefit Guaranty Corporation coverage
employer bears investment risk
able to use Social Security integration
all of the above
only a and b
Answer: D [p. 144]
Application
15.7
Bane Industries, Inc. has 1,000 employees. The average age of the workforce at Bane is
45 and 80% of the workers earn a mid-range income. Ten percent of workers are highly
compensated and 10% of workers are low wage workers. Advantages of using a cash
balance plan at Bane Industries include:
a.
b.
c.
d.
e.
employer can spread administrative cost over a large number of employees
younger workers have time to accumulate retirement savings
employee bears investment risk
only a and b
only a and c
Answer: D [p. 141]
15.8
John Appleton, owner of Appleton Enterprises, Inc. is considering installing a retirement
plan in his company. He wants a plan that allows the use of Social Security integration.
Which of the following plans would permit this?
a.
b.
c.
d.
e.
cash balance plan
typical defined contribution plan
typical defined benefit plan
all of the above
a and c only
Answer: D [p. 144]
15.9
Directors of Xenon Corporation are considering changing from a traditional defined benefit
plan to another type of plan. They have asked you to explain the advantages and
disadvantages of such a change. You tell them if Xenon Corp converts to:
a. a defined contribution plan, most or all plan assets would be immediately credited to
vested employees
b. a cash balance plan, Xenon Corp. must increase the level of contribution to older
employees
c. a cash balance plan, Xenon Corp. would no longer need actuarial services
d. only a and b
e. only a and c
Answer: A [p. 141]
15.10 Eileen Tate, an employee of Great Corp., is 52, and her company has just converted its
defined benefit plan to a cash balance plan. The present value of her accrued benefit is
$375,000. Under the cash benefit plan, Great Corp. will make an annual contribution of
11% to the employees’ hypothetical accounts and guarantee a 6% interest rate. If a cash
balance plan had been in effect since Eileen’s date of hire, she would have $300,000.
Eileen’s annual salary is $105,000. Under the cash balance plan, the value of the annual
contribution to Eileen’s retirement account will be:
a.
b.
c.
d.
e.
$18,000
$11,500
$ 6,300
the same contribution amount that she received under the defined benefit plan
$0 until the excess $75,000 is credited to her hypothetical account
Answer: E [p. 143]