Question

In this assignment, you will be given several different scenarios. You will need to type on a separate sheet of paper which plan type you think would be best for each situation and why you have chosen that plan type. Each scenario will be worth 1 point. There are nine scenarios, so you will receive 1 extra point for turning the assignment in on time. Each scenario will have only one correct answer and you may not use the same plan type for more than one scenario. The plan types that you can choose from are: a Straight Defined Benefit Plans, a Target Benefit Plans, an ESOP, a SIMPLE, a SEP, a 401(k), a 403(b), a Profit Sharing Plan, or a Money Purchase Pension Plan.

Scenario #8

A medium-sized actuarial consultancy has been providing risk management services to the health insurance industry for years. The owners have been very focused on operating the business. When they retire, they will be able to sell the business for several millions of dollars each. They are not concerned about their own retirements. However, they have recently been approached by a trusted key employee who has informed them that several of the employees are not satisfied with the company’s lack of a retirement plan. Two of the employees actually have job offers from another company. The owners met to discuss this and decided that while they are not willing to bear any investment risk, they are willing to make company-paid contributions. Since they are actuaries and love math, they have decided that they would like to aim for a certain benefit for everyone. While they do not want any liability to provide a specific benefit, they are intrigued by the “game” to see if their projections turn out correctly. What plan type is best for this potential client?

Answer 1

As the owners are willing to make paid-up contributions to the company, so they may go either for money purchase pension plan or 403(b) plan.

As they don't want investment risk and want to provide certain benefits to all the employees so the straight defined, target benefit, SIMPLE and profit sharing are eliminated. Moreover they can't provide ESOP to all the employees. Also SEP is eliminated as it is completely based on the employees own salary.

Only 403(b) and money purchase pension plan are 2 possibilites whereby owners/employers can make the contributions based on certain criteria, and I think 403(b) is more appropriate for this case as it has a percentage contribution from owners as a fixed percentage of salaries of employees. So here this plan would work as employers can make conributions to each employee based on certain fixed percentage may be based on their salaries.