CPFO Exam - Risk, Benefits,
Procurement Exam 100% Correct!!
How many full-time public employees are covered by defined benefit plans? -
ANSWERSNinety-one percent
How many full-time public employees are covered by defined contribution plans? -
ANSWERSnine percent
Prudent-Person Rule - ANSWERSRequires each retirement board member to perform
his or her duties as a prudent person would when acting in a like capacity and in a
similar situation.
Defined Benefit Plan - ANSWERSProvides for a guaranteed benefit at retirement using
a formula generally based on age, length of service and salary.
Defined Contribution Plan - ANSWERSProvides for benefits based on the assets
available in employees' individual accounts.
Defined Benefit Plan - Employer Perspective - ANSWERS"Funding Certainty: Liabilities
change based on actuarial assumptions regarding future salary increases, investment
earnings, employee turnover and plan experience. Predictable Costs: Annual
contributions can vary from year to year based upon actuarial assumptions. Many plans
are funded based on a consistent rate of contribution set by statute. Recruitment Tool:
Typically not portable between employers, unless under same umbrella system (e.g.
WRS). Reward Long-service Employees: Benefits typically based on final year(s)
salary. Administrative Expenses: Include actuarial valuation, record keeping and
investment management. Investment Risk: Assumed by the employer."
Defined Benefit Plan - Employee Perspective - ANSWERS"Benefit Potential: Benefits
paid at retirement are for life and are guaranteed by the plan's formula. COLAs are
common. Understanding benefits: Require explanation as they are based on a set of
variables. Typically, there are no separate accounts. Access to Assets while Employed:
Benefits may not be withdrawn while actively employed. Reward long-service
Employees: Based on final year(s) salary. Recruitment Tool: Benefits have limited
portability Investment Risk: Risk is assumed by the employer."
Defined Contribution Plan - Employer Perspective - ANSWERSFunding Certainty:
Employer liability is fulfilled annually as contributions are made to employee accounts
typically based on a percentage of payroll. Predictable Costs: Annual cash expenditures
are more predictable as they are based on a set percentage of employee salaries.
Recruitment tool: benefits are portable Reward long service: Benefits are based upon
accumulated contributions and earnings Admin Expenses: Lower, as no actuarial
, valuation is necessary. Employee education costs and recordkeeping may be higher.
Investment Risk: Assumbed by the employee."
Defined Contribution Plan - Employee Perspective - ANSWERS"Benefit Potential:
Based on contributions and earnings. The final retirement benefit can be eroded by pre-
retirement distributions and inflation. Understanding benefits: Benefits based on a
percentage of salary. No other variables need to be considered. Each individual has a
separate account. Access to Assets while Employed: Benefits may be withdrawn under
certain circumstances (e.g. loans, death, or disability) per IRS guidelines. Rewards
long-service employees: Not really, based on accumulated earnings and contributions."
Retirement plan funding objectives - ANSWERS1. Maintain stable contribution rates 2.
eliminate the unfunded accrued liability wihtin a certain time frame 3. Maintain inter-
generational equity by not passing current costs on to future generations 4. Utilize
techniques to hedge against unexpected adverse experience.
Retirement plan funding methods - ANSWERSLevel: produce contribution rates based
on an even percentage of payroll. Graduated: funds benefits by increasing the
percentage of payroll contribution over an individual's career.
Unfunded Accrued Liability (UAL) - ANSWERSThe excess of the total liabilities, both
present and prospective, over the present assets and present value of future normal
costs.
Closed Amortization - ANSWERSFinancing the UAL over a specific number of years
with the number of years declining as each year passes.
Open Amortization - ANSWERSNumber of years to pay off the UAL may remain
constant from year-to-year.
Three methods of valuing assets - ANSWERS1. Book Value: Represents the
cumulative actual cost of acquiring the assets. 2. Market Value: Values the assets at
their sale price, producing the fluctuation in asset values. 3. Smoothed Market Value:
Recognize only a portion (i.e. 20%) of the unrealized gains and losses each year. This
creates a smoother trend in the assets, and best supports a funding policy of stable
contributions rates over time.
Annuity - ANSWERSA series of periodic payments for a fixed future period or for life.
Fiduciary - ANSWERSAn individual, corporation or association to whom certain property
is given to hold in trust according to a trust agreement.
Hedge - ANSWERSA practice of using certain techniques or strategies to lessen the
effects of upward inflation or swings in investment returns.
Qualified Plan - ANSWERSRetirement plan meets the requirements of the IRS.
Procurement Exam 100% Correct!!
How many full-time public employees are covered by defined benefit plans? -
ANSWERSNinety-one percent
How many full-time public employees are covered by defined contribution plans? -
ANSWERSnine percent
Prudent-Person Rule - ANSWERSRequires each retirement board member to perform
his or her duties as a prudent person would when acting in a like capacity and in a
similar situation.
Defined Benefit Plan - ANSWERSProvides for a guaranteed benefit at retirement using
a formula generally based on age, length of service and salary.
Defined Contribution Plan - ANSWERSProvides for benefits based on the assets
available in employees' individual accounts.
Defined Benefit Plan - Employer Perspective - ANSWERS"Funding Certainty: Liabilities
change based on actuarial assumptions regarding future salary increases, investment
earnings, employee turnover and plan experience. Predictable Costs: Annual
contributions can vary from year to year based upon actuarial assumptions. Many plans
are funded based on a consistent rate of contribution set by statute. Recruitment Tool:
Typically not portable between employers, unless under same umbrella system (e.g.
WRS). Reward Long-service Employees: Benefits typically based on final year(s)
salary. Administrative Expenses: Include actuarial valuation, record keeping and
investment management. Investment Risk: Assumed by the employer."
Defined Benefit Plan - Employee Perspective - ANSWERS"Benefit Potential: Benefits
paid at retirement are for life and are guaranteed by the plan's formula. COLAs are
common. Understanding benefits: Require explanation as they are based on a set of
variables. Typically, there are no separate accounts. Access to Assets while Employed:
Benefits may not be withdrawn while actively employed. Reward long-service
Employees: Based on final year(s) salary. Recruitment Tool: Benefits have limited
portability Investment Risk: Risk is assumed by the employer."
Defined Contribution Plan - Employer Perspective - ANSWERSFunding Certainty:
Employer liability is fulfilled annually as contributions are made to employee accounts
typically based on a percentage of payroll. Predictable Costs: Annual cash expenditures
are more predictable as they are based on a set percentage of employee salaries.
Recruitment tool: benefits are portable Reward long service: Benefits are based upon
accumulated contributions and earnings Admin Expenses: Lower, as no actuarial
, valuation is necessary. Employee education costs and recordkeeping may be higher.
Investment Risk: Assumbed by the employee."
Defined Contribution Plan - Employee Perspective - ANSWERS"Benefit Potential:
Based on contributions and earnings. The final retirement benefit can be eroded by pre-
retirement distributions and inflation. Understanding benefits: Benefits based on a
percentage of salary. No other variables need to be considered. Each individual has a
separate account. Access to Assets while Employed: Benefits may be withdrawn under
certain circumstances (e.g. loans, death, or disability) per IRS guidelines. Rewards
long-service employees: Not really, based on accumulated earnings and contributions."
Retirement plan funding objectives - ANSWERS1. Maintain stable contribution rates 2.
eliminate the unfunded accrued liability wihtin a certain time frame 3. Maintain inter-
generational equity by not passing current costs on to future generations 4. Utilize
techniques to hedge against unexpected adverse experience.
Retirement plan funding methods - ANSWERSLevel: produce contribution rates based
on an even percentage of payroll. Graduated: funds benefits by increasing the
percentage of payroll contribution over an individual's career.
Unfunded Accrued Liability (UAL) - ANSWERSThe excess of the total liabilities, both
present and prospective, over the present assets and present value of future normal
costs.
Closed Amortization - ANSWERSFinancing the UAL over a specific number of years
with the number of years declining as each year passes.
Open Amortization - ANSWERSNumber of years to pay off the UAL may remain
constant from year-to-year.
Three methods of valuing assets - ANSWERS1. Book Value: Represents the
cumulative actual cost of acquiring the assets. 2. Market Value: Values the assets at
their sale price, producing the fluctuation in asset values. 3. Smoothed Market Value:
Recognize only a portion (i.e. 20%) of the unrealized gains and losses each year. This
creates a smoother trend in the assets, and best supports a funding policy of stable
contributions rates over time.
Annuity - ANSWERSA series of periodic payments for a fixed future period or for life.
Fiduciary - ANSWERSAn individual, corporation or association to whom certain property
is given to hold in trust according to a trust agreement.
Hedge - ANSWERSA practice of using certain techniques or strategies to lessen the
effects of upward inflation or swings in investment returns.
Qualified Plan - ANSWERSRetirement plan meets the requirements of the IRS.
