Chapter 2 Class Notes

Planning for Retirement Needs
The Retirement Field
Chapter 2
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Chapter 2: Overview
• Getting a feeling for the pension business
-Laws
-Regulators
-Professionals and organizations
-Sources of information
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ERISA
- Amends the labor law to ensure the employee’s
right to collect promised benefits
Title II - Amends the Internal Revenue Code to condition tax
benefits on meeting minimum standards
Title III - Creates a regulatory framework for ongoing
implementation, dividing responsibilities
between the DOL and the IRS
Title IV - Establishes the Pension Benefit Guarantee
Corporation to insure benefit payments
from defined-benefit pension plans
Title I
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Legislative Changes
• Taxation of benefits
• IRAs
• Maximum deductible
contributions
• Limiting tax deferral
• Parity
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• Small businesses
• Affiliation
requirements
• Funding
• ESOPs
• Simplification
Pension Protection Act of 2006
• Focus on funding defined benefit plans
– Revises minimum funding requirements for 2008
– Creates consequences for seriously underfunded plans
– More reporting and disclosure to participants
• Protect plan participants
– DC benefits more portable by more accelerated vesting
– DC plans with publicly traded employer securities must give
participants opportunity to diversify investments
• Makes permanent current contribution limits
• Improve pension system
– Validating the cash balance design
– Encourage automatic enrollment in 401(k) plans
– Mechanism for participant investment advice
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IRS
• Initial qualification (voluntary)
• Auditing (Form 5500)
• Interpretation
– Regulations
– Revenue Rulings
– Private Letter Rulings
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DOL
• Enforces reporting and disclosure rules (distribution of
SPD and SAR)
• Polices investments
– avoid prohibited transactions
– prudent
– exclusive benefit rule
• Polices fiduciaries
• Also interprets legislation
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PBGC
• Insures defined-benefit plans
– excludes professional services organizations
with fewer than 25 employees
• Oversees fund solvency
– voluntary termination
– involuntary termination
• Legal interpretation
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Additional Comments
• Market of private employers includes
– corporations
– sole proprietors (Keogh plans)
– partnerships
– nonprofit organizations
• Master and prototype plan documents
• Note marketing lists in the text
• Skim resources materials
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True/False Questions
1. Title I of ERISA protects participants by allowing them to sue
fiduciaries in order to collect promised benefits. [2-1] true
2. Disqualifying a qualified plan can have negative tax implications for
the employer but not for the participants. [2-2] false
3. ERISA established the top-heavy requirements. [2-1] false
4. The Pension Protection Act of 2006 made significant changes to the
funding rules that apply to defined-benefit plans. [2-1] true
5. An individual or corporation that has discretionary authority or
responsibility over the administration of the plan is a fiduciary. [2-2] true
6. The PBGC issues advance determination letters regarding the
qualified status of plans. [2-2] false
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True/False Questions
7. All defined-benefit pension plans are covered under the insurance
program of the Pension Benefit Guaranty Corporation (PBGC). [2-2]
false
8. The Internal Revenue Service polices the investment of plan
assets. [2-2] false
9. The Internal Revenue Service is responsible for enforcing the
fiduciary rules that apply to those who manage plan assets. [2-2] false
10. Many plan sponsors farm out the administrative process to thirdparty administrators. [2-3] true
11. The Pension Answer Book is an example of a primary reference
source. [2-2] false
12. Unfortunately, the IRS and Department of Labor publications are
arcane and difficult to read, and are of little use to the financial
services practitioner. [2-2] false
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