Module 1 - An Overview of Retirement Planning.docx

Given the regulatory backdrop it is easy to see why

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Given the regulatory backdrop, it is easy to see why many employer-sponsored retirement plans use a pre-packaged prototype plan, which is pre-designed to meet all regulatory hurdles. Occasionally, employers will still desire to customize certain features of their plan. These customized plans do provide more flexibility, but they are also costlier to administer and more difficult to establish. Lesson 3: Pension-Type Plans In Lesson 2, we discussed the differences between defined benefit and defined contribution plans. We also discussed the regulatory framework imposed by ERISA and the PPA of 2006. In Lesson 3, we will discuss the difference between pension-type plans and profit sharing-type plans. We will then drill down in detail on the various plan types that are pension-type in nature. Learning Objectives Identify the difference between a pension-type plan and a profit-sharing type plan. Explain why an employer might choose to offer a defined-benefit plan. Identify how benefits can be calculated for a defined benefit plan. Describe the basic features of a cash-balance plan and its potential usefulness. Describe the basic features of a money-purchase pension plan and its potential usefulness. Describe a target-benefit plan and its potential usefulness Pension-Type vs. Profit Sharing-Type Plans All qualified plans are either a DB or a DC plan, all qualified plans are also either a pension-type plan or a profit sharing-type plan.
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The table above lists which category different retirement account types fall into. There are three primary distinctions that separate these two categories: 1. The first distinction is the obligation level for contributions. Employers who offer a pension-type plan are obligated to make a certain annual contribution. However, employers who offer a profit sharing-type plan are not required to make specified contributions. 2. The second distinction relates to the allowable timing for distributions. Pension-type plans have specific limitations on when withdrawals can be made. Generally, the rule is that an employee must be of retirement age in order to receive a distribution (withdrawal) from their pension-type asset. On the other hand, profit sharing-type plans permit in-service withdrawals , which are distributions while the employee is still working. Certain restrictions apply to in-service withdrawals and we will be discussing that in detail in another lesson. 3. The third area of distinction pertains to the use of company stock in the investment pool. Pension-type plans are limited to no more than 10% of the assets being invested in employer stock. This measure prevents a pension plan from owning a considerable amount of voting shares and potentially influencing the actions of the company which endowed it. Profit sharing- type plans have no restrictions on ownership of employer stock.
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  • Spring '14

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