Retirement Plan Design & Administration Flashcards

What is the main goal of a defined benefit plan?

Answer: To provide guaranteed retirement income

The main goal of a defined benefit plan is to provide participants with a guaranteed retirement income, typically a fixed monthly payment for life. The employer bears the investment risk and is responsible for funding the plan to ensure these promised benefits are paid. This offers retirees a predictable and secure income stream, unlike defined contribution plans where benefits fluctuate with investment performance.

Which document outlines the rules of a retirement plan?

Answer: Plan document

The plan document is the foundational legal document that outlines all the rules, terms, and conditions governing a retirement plan. It details eligibility requirements, contribution formulas, vesting schedules, distribution options, and other critical provisions. This document ensures the plan operates in compliance with relevant laws and regulations, serving as the official blueprint for its administration.

What is the role of a plan administrator?

Answer: To ensure regulatory compliance

A plan administrator is responsible for the day-to-day operation and management of a retirement plan, with a primary role in ensuring regulatory compliance. This includes tasks such as processing contributions and distributions, maintaining accurate records, filing required reports with government agencies, and ensuring the plan adheres to laws like ERISA and IRS codes. Their diligence helps protect the plan's integrity and participants' benefits.

Which law governs private pension plans in the U.S.?

Answer: ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is the comprehensive federal law that governs most private sector employee benefit plans, including pension and retirement plans, in the U.S. ERISA sets minimum standards for these plans, protecting participants and beneficiaries by establishing fiduciary responsibilities, reporting requirements, and disclosure rules to ensure proper plan administration and financial integrity.

What type of contribution is fixed in a defined contribution plan?

Answer: Employer or employee contributions

In a defined contribution plan, the amount of money contributed by the employer, the employee, or both is fixed or determined by a specific formula. Unlike defined benefit plans, the retirement benefit is not guaranteed; instead, it depends on the investment performance of these contributions over time. The employee typically bears the investment risk, as their final payout is based on the accumulated account balance.

Why is vesting important in plan administration?

Answer: To grant ownership of contributions over time

Vesting is a crucial concept in retirement plan administration as it determines when an employee gains non-forfeitable ownership of employer contributions. It's important because it ensures that employees earn a right to their retirement savings over time, preventing them from losing all employer-provided funds if they leave the company prematurely. Vesting schedules encourage employee retention while protecting plan assets.

What is nondiscrimination testing?

Answer: Ensuring fair plan treatment among employee groups

Nondiscrimination testing is a set of IRS-mandated rules designed to ensure that retirement plans do not disproportionately favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs) regarding benefits and contributions. This testing helps maintain fairness and broad participation in the plan, preventing situations where the plan primarily benefits a select group of high earners.

What does a Summary Plan Description (SPD) provide?

Answer: A simplified explanation for participants

A Summary Plan Description (SPD) is a document required by ERISA that provides plan participants with an easy-to-understand summary of their retirement plan's key features. It explains their rights and responsibilities in plain language, covering eligibility, benefits, vesting, and claims procedures. The SPD ensures transparency and helps participants make informed decisions about their retirement savings.

What is the maximum contribution limit to a 401(k) plan for 2024 (excluding catch-up)?

Answer: $23,000

For 2024, the Internal Revenue Service (IRS) increased the maximum employee contribution limit for 401(k) plans (and 403(b) and most 457 plans) to $23,000. This limit applies to elective deferrals, meaning the amount an employee can contribute from their paycheck. It does not include additional catch-up contributions allowed for individuals aged 50 and over.