CRC Retirement Plan Design

Question 1

What is the purpose of a defined benefit plan?

Accepted Answer

To guarantee retirement income

Answer

A defined benefit plan, often called a pension, promises a specific monthly payment to retirees for the rest of their lives. The employer bears the investment risk and is responsible for funding the plan to ensure these guaranteed payments. This provides a predictable and stable income stream in retirement.

Question 2

Which plan type allows employee salary deferral?

Accepted Answer

401(k) plan

Answer

A 401(k) plan is a defined contribution retirement plan that allows employees to contribute a portion of their pre-tax salary directly from their paycheck. This "salary deferral" reduces their current taxable income. Employers often offer matching contributions, further incentivizing participation and boosting retirement savings.

Question 3

What is a vesting schedule?

Accepted Answer

Ownership timeline for employer contributions

Answer

A vesting schedule dictates when an employee gains full ownership of employer contributions made to their retirement plan, such as a 401(k). Until contributions are fully vested, an employee might forfeit some or all of them if they leave the company. This encourages employee retention and ensures employees earn their benefits over time.

Question 4

Which plan allows employers to contribute a fixed percentage of salary?

Accepted Answer

Money purchase pension plan

Answer

A money purchase pension plan is a type of defined contribution plan where the employer is required to contribute a fixed percentage of each employee's salary annually. Unlike profit-sharing plans, these contributions are mandatory regardless of company profits. This provides a consistent and predictable contribution for employees' retirement savings.

Question 5

What is a common feature of defined contribution plans?

Accepted Answer

Fixed contributions, uncertain benefit

Answer

Defined contribution plans, such as 401(k)s and 403(b)s, are characterized by fixed contributions made by the employee and/or employer. However, the ultimate retirement benefit is not guaranteed; it depends on the investment performance of these contributions over time. The employee typically bears the investment risk.

(CRC) Certified Retirement Counselor Practice Test

(CRC) Certified Retirement Counselor Practice Test

CRC Retirement Plan Design