Question

Bill's employer maintains a target benefit pension plan. Bill is age 59. The plan was originally designed to benefit a 38-year-old key employee. There is also substantial turnover at Bill's company. Which of the following statements is (are) CORRECT?

A. Bill knows exactly what retirement benefit to expect.
B. Bill's retirement benefit is funded through elective deferrals.
C. Forfeitures are likely to be allocated equally to Bill and the 38-year-old key employee.
D. Contributions to the plan are mandatory.

Answer 1

Bill can expect a predetermined retirement benefit from his target benefit pension plan, with employer contributions being mandatory and not based on employee elective deferrals. Forfeitures may favor Bill due to his greater age and proximity to retirement.

Step-by-step explanation:

When examining Bill's situation with his employer's target benefit pension plan, there are specific aspects to consider based on the nature of this type of retirement plan.

A. Bill knows exactly what retirement benefit to expect. Target benefit plans offer a predetermined benefit upon retirement, often based on salary and years of service. Therefore, Bill can anticipate his retirement benefit amount with a reasonable degree of certainty.

B. Bill's retirement benefit is funded through elective deferrals. Unlike defined contribution plans such as 401(k)s, target benefit plans are generally funded by employer contributions, not by elective deferrals made by employees.

C. Forfeitures are likely to be allocated equally to Bill and the 38-year-old key employee. Allocation of forfeitures in target benefit plans can be disproportionate, favoring employees with longer service and those closer to retirement, implying that Bill might benefit more from forfeitures due to his age.

D. Contributions to the plan are mandatory. In a target benefit plan, employer contributions are indeed mandatory to fund the promised benefit.