Life & Health Insurance Exam (National Portion)Life InsuranceHard
An employer establishes a retirement plan where contributions are made by the employer, but the amount of the benefit at retirement is not guaranteed and depends on the investment performance of the plan assets. This type of plan is known as a:
- ADefined Contribution Plan
- BDefined Benefit Plan
- CSimplified Employee Pension (SEP) Plan
- DNon-Qualified Deferred Compensation Plan
Show answer & explanationAnswer & explanation
Correct answer: A. Defined Contribution Plan
A Defined Contribution Plan specifies the amount of contribution to the plan, typically by the employer, but the ultimate benefit received by the employee at retirement is not guaranteed and depends on the investment growth of those contributions. This contrasts with a Defined Benefit Plan, which guarantees a specific payout at retirement.
Why the other options are wrong
- B. A Defined Benefit Plan guarantees a specific retirement benefit amount, not just contributions.
- C. A Simplified Employee Pension (SEP) Plan is a type of Defined Contribution Plan, but 'Defined Contribution Plan' is the broader and more accurate classification described by the scenario.
- D. A Non-Qualified Deferred Compensation Plan is typically for a select group of executives and does not have the same tax advantages or ERISA protections as qualified plans.
Defined Contribution Plan
A retirement plan where the employer's contribution is defined, but the ultimate retirement benefit depends on investment performance and is not guaranteed.
- Contribution amount is fixed or formula-based.
- Investment risk borne by the employee.
- Benefit at retirement is variable.
Memory trick: Retirement plans are 'Defined' by what's 'Guaranteed': 'Contributions' or 'Benefits'.