Designing and Administering Benefits Chapter 12 MGT 3513 Practice Questions

Amount of retirement benefit known? Defined Benefit Plan (pension) Retirement Plans Amount of retirement benefit known? Who bears the risk? Funding Defined Benefit Plan (pension) Defined Contribution

Amount of retirement benefit known? Defined Benefit Plan (pension) Retirement Plans Amount of retirement benefit known? Who bears the risk? Funding Defined Benefit Plan (pension) Yes (usually a percentage of the employee’s salary; e.g., 80% of average of 4 highest year’s earnings) The company is responsible for making sure they have invested and “grown” enough money to fund retirement for employees. The company must fund the plan while the employee works for it; this plan usually pays monthly for the remainder of the employee’s life Defined Contribution No. The retirement amount will be the value of the 401k when the employee retires. There is no way to know the amount. The employee is responsible for making investment decisions. The company and employee both fund the plan. The company’s contributions are only portable once the employee is vested. The employee’s contributions are always portable.

Example - - Retirement Benefits – Defined Contribution Employee contributions Company contributions What amount is portable? Year 1 2,000 1,500 Year 2 Year 3 Year 4 Year 5* 10,000 7,500 * Assume vesting occurs at the end of year 5

Example - - Retirement Benefits – Defined Contribution Employee contributions Company contributions What amount is portable? Year 1 2,000 1,500 Year 2 4,000 Year 3 6,000 Year 4 8,000 Year 5* 17,500** 10,000 7,500 * Assume vesting occurs at the end of year 5 ** The amount is 17,500 because the employee’s contributions are always portable (10,000) and the company’s contributions are now portable because the employee is vested.

Example - - retirement benefits Josh’s company informs him that they will contribute 8% of his salary to a retirement fund and that he must also match that contribution. Defined benefit or defined contribution Ellen’s company informs her that she will receive $3,000 every month after she retires.

Example - - retirement benefits Hunter has worked for LTD for 20 years. His retirement fund totals $40,000. His company contributed $20,000, and he also contributed $20,000. Is Hunter vested? Yes –safe to assume after 20 years he would be vested. How much of Hunter’s retirement funds are portable? $40,000 Do you think this is this an example of defined benefit or defined contribution? Defined contribution

Example - - retirement benefits Hunter has worked for LTD for 2 years. His retirement fund totals $40,000. His company contributed $20,000, and he also contributed $20,000. Is Hunter vested? Depends on his company’s policy. Most companies require more than 2 years to vest. How much of Hunter’s retirement funds are portable? If he is not vested, only $20,000 are portable.