Question

Age-Based Profit Sharing Plans

a.) Use time value of money to help determine allocations.
b.) Consider on the employee's age in determining the contribution to each employee's account.
c.) Are less popular with plan sponsors than Target Benefit Pension Plans because Target Benefit Pension Plans do not require mandatory funding.
d.) Make larger contributions to younger employees' accounts.

Answer 1

Age-Based Profit Sharing Plans consider the age of employees for allocating contributions, compared to Target Benefit Pension Plans that don't require mandatory funding. Defined contribution plans like 401(k)s and 403(b)s are now more common, offering tax-deferred growth and portability between employers.

Step-by-step explanation:

The discussion about Age-Based Profit Sharing Plans centers around the use of the time value of money to determine allocation of funds to employees' retirement accounts. Employers who sponsor such plans often consider employee's age when determining contribution levels. Contrarily, this may lead to larger sums being allocated to older employees because they have a shorter time to accrue compound interest before retirement. This is in contrast to Target Benefit Pension Plans, which are sometimes preferred by sponsors due to the lack of mandatory funding and typically do not consider individual ages for allocation amounts.

Defined contribution plans like 401(k)s and 403(b)s have largely replaced traditional pension plans in the modern workforce. These plans allow employers to contribute a fixed amount to the employee's retirement account, with employees often contributing as well. The money is then invested in a range of vehicles and is tax-deferred. The flexibility of these plans makes them attractive as they are portable across different employers and can help retirees avoid the inflation costs that can burden traditional pensioners.