c5solutions_1103 - Fall 2003 Course 5 Written-Answer...

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Fall 2003 Course 5 Written-Answer Solutions Question #1 Solution (a) Older workers are treated fairly – allows unproductive workers (due to age) to be able to retire. Wages deferred – cost of retirement shifted to working years Need for retirement income – companies want to provide for retirement of employees Shift investment risk to or from employee – DC plan allows employee to participate in risk. DB plan places risk with employer Competition – Need good benefits to attract good employees Unions may demand a plan – may adopt to keep worker from unionizing Tax treatment is favorable for qualified pensions – company can deduct contributions. Plan assets are not taxed on buildup. Benefits only taxed when received (b) Consider Internal and external factors Why is company considering plan Who should benefit the most – young or old employees? Financial position of company – how much can it afford? Employees understand DC plans more, older employees appreciate DB plans DB or DC? Who should pay – employer or employee? Economic conditions Market research – what plans does the competition sponsor, what do employees want Preliminary plan design Come to consensus on main plan features DC or DB Ancilliary benefits such as death, disability Risk classes offered Employee contributory or employer paid Determine feasibility Regulatory barriers – filing of plan, is it discriminatory Implementation barriers – registering employees Preliminary Pricing Estimate expected participation Need to determine assumptions Expected profit margin for insurance company if insured Cost benefit analysis – decide whether to proceed
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Question #1 Solution Continued Final plan design Review initial pricing for errors and inconsistencies Agree on final plan design Finalize assumptions Price key cells using final assumption Include more cells for pricing Sensitivity Test assumptions Implementation – starts early and finishes late May need new software – buy or develop Administration procedures developed Enroll employees Calculate normal costs / supplemental costs Choose a funding method File plan Product Management Track experience File reports with ERISA/IRS Funding Pay benefits Funding Method differences to consider Normal costs allocated by benefit or cost If cost, level dollar or level percent Is a supplemental liability created? Entry age or attained age Spread loss or immediate recognition and amortization Aggregate or individual Open or closed groups
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Question #2 Solution a.i) Flat Amount Small maybe 10,000 or 25,000 Salary Bracket Plan Example such as Salary up to $20K = $20K, Salary $20 - $40K = 40K Position Plan Example such as: Hourly Employees = $25K, Non-Officer managers = $50K, Officers - $100K Multiple of Earnings Benefit is typically 1x, 2x, 3x earnings May reduce amount according to age
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This note was uploaded on 03/27/2012 for the course MATHEMATIC 4523 taught by Professor Zhangqiang during the Spring '12 term at City University of Hong Kong.

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c5solutions_1103 - Fall 2003 Course 5 Written-Answer...

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