RMI Final CH 12 & 13

RMI Final CH 12 & 13 - CH 12 Retirement Risks and...

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CH 12: Retirement Risks and Employee Benefit Plans Retirement Income Sources: Social Security, Pension Plan, Personal savings Define Basic Contribution Plan (DC) ER promises to contribute a % of EE’s salary to a DC plan on behalf of an EE (in addition to salary, not taken from salary) Known: the annual contribution made by ER Unknown: the annual retirement benefit received at retirement o EE may also contribute o Funds are invested until retirement o Different EEs have different number of years of service o Future salary is unknown o Income also depends on the price of an life annuity when the EE retires What is their life expectancy? Key: Uncertainty regarding future retirement income, rate of return and investment risk rests with the EE Easier to roll over to another plan, i.e. changing ERs Qualified DC Plan: 401k o Qualified meaning meets tax code requirement o Cash or Deferred Arrangement (CODA) plan o Ex: EE entitled to $x compensation Take $ amount now Taxable choice Defer compensation to future date Create a tax liability. Income will be taxed at retirement when EE start taking money out EE contributions are referred to as elective referral in tax code o ER may or may not match EE contributions (how 401k differs from basic DC) o EEs have the choice of investment vehicles for their accounts Other Qualified DC Plans o Profit sharing: ER distributes a portion of its tax deferred profits Based on EE age and years of service (i.e. cash or bonus) o EE Stock Ownership Plan (ESOP): Money invested in ER’s company stock ER’s contribution not dependent on profit o Simplified EE Pension (SEP): Like traditional IRA ER contribution limit higher Less costly to establish and administer o Savings Incentive Match Plan for EEs (SIMPLE): ER’s fewer than 100 EEs contribute pre- tax and ERs match Defined Benefit (DB) Traditional pension plans
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