Mrs. Davis, human resources manager at California State University, Sacramento, has just explained to Jennifer
that newly hired assistant professors must choose between two retirement plan options. Mrs. Davis’s explanation was that Jennifer’s two alternatives are: (1) the state’s defined benefit plan and (2) a defined contribution plan under which the university will contribute each year an amount equal to 8% of her salary. The defined benefit plan will provide annual retirement benefits determined by the following formula: 1.2%* years of service* salary at retirement. Jennifer was hired at the beginning of 2011 as a salary of $100,000. The state is currently assuming that Jennifer’s salary will rise about 3% a year; Jennifer will retire after 40 years and will draw retirement pay for 20 years. The interest rate the state use in the calculation is 6%. Required: If Jennifer chose the state’s defined benefit plan and projections hold true, what is the present value of her retirement annuity as of the anticipated retirement date (end of 2050)? (5 points) Suppose instead that Jennifer chose the defined contribution plan. Assume that the rate of increase in salary is the same as the state assumes and that the rate of return on her retirement plan assets will be 6% compounded annually, what will be the future value of her plan assets as of the anticipated retirement date (end of 2050)? (5 points) What will be her annual retirement pay (assuming continuing investment of remaining assets at 6%)? (5 points) Based on this numerical comparison, which plan would she choose? (5 points) What other factors must she also consider in making the choice? (5 points)
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