RPA 1: Assignment 1 Questions and Answers 100% Correct

RPA 1: Assignment 1 Questions and Answers 100% Correct What is the three legged stool of economic security? Social security, personal savings, employee pensions What are the economic problems facing the aged? (4 answer total) 1. Desire to maintain pre-retirement standard of living 2. Declining employment opportunities 3. Low savings due to higher taxes, increased consumption, and inflation 4. Improvement in longevity What is a reverse annuity? Monthly income for life in exchange for title at the time of the owner's death. Explain the impact of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) with respect to retirement plans. (7 answers total) 1. Increased contribution, benefit and deduction limits for all types of retirement savings 2. Business credits for start-up of retirement plans 3. Tax credits for lower/middle-income employees contributing to retirement plans 4. Greater parity for corporate, nonprofit and govt plans 5. Greater contribution limits to retirement plans for 50+ yr olds 6. New "qualified Roth contribution program" provision 7. Greater portability for retirement program, easier rollovers Explain the increase in longevity and changing demography. TBD Reasons for growth of private pensions. (8 reasons total) 1. Increased productivity and morale of employees 2. Tax considerations/advantages 3. Wage stabilization programs of WW2 4. Pressure from unions 5. Attract and retain talent 6. Desire of employers to reward long service 7. Efficiency of formal group savings 8. Sales efforts of funding agencies What are the tax advantages of qualified retirement plans? (5 answers total) 1. Employer contributions can be deducted as business expense 2. Investment income on plan assets is tax deferred 3. No income taxation to employee on employer contributions 4. Can be in lower income bracket when distribution received. 5. Distributions may be taxed on a favorable basis Business Expediency The single concept responsible for growth of early retirement plans. Establishment of plans was management prerogative, motivation was economic benefit accrued to EMPLOYER. Human Depreciation Concept Quality of labor force drops when they get older. i.e. people, like machines, break down. Human Depreciation Concept (COUNTER-ARGUMENT, MAIN POINTS) 1. Aging is physiological and not attributable to the employment relationship. 2. Employer should be logically responsible only for the increase in rate of aging caused by employment hazards 3. Analogy between humans and machines in unsound Deferred Wage Concept Retirement plans offered in lieu of cash wage increase. Deferred Wage Concept (COUNTER-ARGUMENT, MAIN POINTS) 1. Some pay prevailing rate AND have retirement plans 2. Ignores the possibility employers are willing to accept lower profit margin to provide retirement plan 3. If retirement benefits are part of wage, terminated employees should get part of that benefit earned to that point. Major effects of Employee Retirement Income Security Act of 1974 (ERISA) on design of private retirement plans. 1. Effected foundational elements of private retirement. 2. Affected all aspects of corporate and self-employed retirement plans from legal, tax, investment and actuarial viewpoint. 3. Established new reporting, disclosure and fiduciary requirements. 4. Established program of plan termination insurance. 5. Established IRA concept. Major effects of Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) on design of private retirement plans. 1. Reduced maximum limits of retirement plan benefits and contributions. 2. Parity for corporate and self-employed plans. 3. Special restrictions on top-heavy plans favoring "key employees" 4. Federal income tax withholding on retirement and annuity payments. Effects of Tax Reform Act of 1986 (TRA '86) on design of private retirement plans. 1. Imposed new coverage tests 2. Accelerated vesting requirements 3. Changed the rules for integration of plans with Social Security 4. Lowered limits for retirement benefits that begin before 65 5. Changed timing and taxation of plan distributions 6. Terminated IRA deductions for qualified plan participants 7. Changes made to employee stock ownership plans and executive comp. Effects of Pension Protection Act of 2006 to defined contribution plans. 1. Employer incentives to auto-enroll employees 2. Made employer contributions subject to faster vesting schedules 3. Allowed financial service providers to give advice on 401(k) and IRA participants 4. Instituted diversification requirements holding publicly traded employer stock Characteristics of social insurance programs distinguishing them from government insurance programs. 1. Compulsory 2. Provide floor of income 3. Pay based on social adequacy rather than individual equity 4. Loosely related to worker earnings, no means t