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Exam 18: Pension Funds

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Question 1

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Which of the following statements are true about a traditional IRA? I. Subject to an income limit,in 2011 a single person could contribute up to $5,000 per year of pretax income to an IRA. II. All withdrawals are tax-free. III. Earnings on the IRA account are not taxed until withdrawn. IV. You must begin withdrawals at age 59 ½. V. Withdrawal(s) can be a lump sum or installments.

A) I,II,IV
B) I,II,IV,and V
C) I,III,and V
D) II,IV,and V
E) III,IV,and V

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Question 2

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A Keogh plan is designed for self-employed individuals.

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Question 3

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What are the main provisions of ERISA?

If you believe that taxes are going to go up and you will likely have to pay a high tax rate when you retire,you will probably be better off with a Roth IRA than with a traditional IRA.

There are now Roth versions of 401(k)plans and 403(b)plans as well as Roth IRAs.

An individual is considering contributing $4,000 per year to either a traditional or a Roth IRA. Payments would begin in one year. If she uses the traditional IRA,her contributions would be fully deductible. She is 40 years old and is in a 28 percent tax bracket. On either IRA she can earn 7 percent. When she retires at age 65,she believes she will be in a 28 percent tax bracket. Which type of IRA should she choose if she invests not only the $4,000 per year,but any tax savings due to the deductibility of her contributions in a taxable investment earning a pretax rate of 7 percent? She will withdraw all her money upon retirement and may owe taxes then,depending on the type of IRA chosen.

At your new job you estimate that your average salary over your working years will be $95,000 per year. How many more years would you have to work to receive as much benefit from a flat benefit of $3,000 times years of service as you would receive from 3.75 percent of your average salary times years of service?

Employee plus employer contributions to a 401(k) are $11,000 per year. Equity funds are earning 10 percent; bond funds,5 percent; and money market funds,3 percent. The employee will retire in 30 years. How much money will he have if he earns the average return from putting 65 percent of his money in equities,30 percent in bond funds,and the rest in money market funds?

How sound is the PBGC? How much do firms pay for pension fund insurance? Describe then-President Bush's proposal to increase funding for PBGC.

An individual is considering contributing $4,000 per year to either a traditional or a Roth IRA. Payments would begin in one year. If she uses the traditional IRA,her contributions would be fully deductible. She is 40 years old and is in a 28 percent tax bracket. On either IRA she can earn 7 percent. When she retires at age 65,she believes she will be in a 15 percent tax bracket. Which type of IRA should she choose if she invests not only the $4,000 per year,but any tax savings due to the deductibility of her contributions in a taxable investment earning a pretax rate of 7 percent? She will withdraw all her money upon retirement and may owe taxes then,depending on the type of IRA chosen.

Employee plus employer contributions to a 401(k) are $15,000 per year. Equity funds are earning 15 percent,bond funds 8 percent,and money market funds 6 percent. The employee wants to retire as soon as possible with $1 million in retirement assets. If he puts 50 percent of his money in stocks,30 percent in bonds,and 20 percent in money funds,how long until he can expect to retire?

Pension contributions paid to insured pension funds and the assets purchased with these funds become the legal property of the insurance company and are not the legal property of the individual pension fund contributors.

Social Security began running a deficit for the first time in what year?

a(n.___________ plan does not require the employer to guarantee retirement benefits nor to maintain a minimum level of pension reserves.

Suppose that a corporate defined benefit plan had decided it will keep pension fund reserves equal to the present value of expected future pension benefits to be fully funded. The plan has expected payouts of $12 million per year for 15 years and then $22 million per year for the subsequent 10 years. All payments are at year-end. At the current 5.75 percent rate of return on the plan's assets,the plan is currently fully funded. If the plan can increase the proportion of stock investments the fund holds and raise the expected rate of return to 8.00 percent,how many dollars of pension assets can be freed up by the corporation?

Under ERISA the maximum time period allowed for vesting is _____________ years.

ERISA established all but which one of the following?

Under ERISA,pension fund managers are required to invest fund assets as wisely as if they were investing their own money. This requirement is called the

Most state and local pension funds are underfunded. rev: 12_13_2013_QC_42629

Private pension funds are funds administered by I. the federal government. II. state and local governments. III. insurance companies. IV. banks and mutual funds.