Question

Which of the following is an advantage of fully insured (Section 412(e)(3)) plans?

A) The investment return is flexible.
B) Employer funding is flexible.
C) Benefits from the plan are guaranteed by the insurance company, with the employer transferring all investment risk to the third party.
D) Participant loans are available.

Answer 1

The advantage of fully insured (Section 412(e)(3)) plans is that they guarantee benefits, with the employer transferring all investment risk to the insurance company, contrasting with the variable returns and personal investment risk of 401(k)s.

Step-by-step explanation:

An advantage of fully insured (Section 412(e)(3)) plans is that the benefits from the plan are guaranteed by the insurance company. This means the employer transfers all investment risk to the third party, which is different from other retirement plans like 401(k)s where the investment risk is typically on the employee.

In a 401(k), the employer and employee contribute a fixed amount regularly, and the employee chooses how to invest these contributions. However, one significant difference with fully insured plans is that the insurance company takes on the investment risk, guaranteeing the promised benefits regardless of how the plan's investments perform. Therefore, the employee benefits from a consistent retirement benefit without worrying about market volatility.