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 #2

A group of construction companies has formed a very small company that can handle union negotiations when the need arises. The company is really just 2 full-time people and a part-time administrative assistant. In order to keep the lead employee, who has a tremendous rapport with the union leaders, they feel that they need to offer some form of retirement benefit. They are willing to have a required contribution that is linked to a percentage of the employee’s compensation, but they do not want to bear any investment risk. They also want to minimize costly coverage testing. Because the employee has limited investment knowledge they want them to be set up to roll their plan into an annuity once they eventually retire. This combination will give the valuable employee peace-of-mind and enable to company to retain this person’s skills. What plan type is best for this potential client?

Answer 1

Solution (1)

These plans are aimed at improving the performance of the company and increasing the value of the shares by involving stock holders, who are also the employees, in the working of the company. The ESOPs help in minimizing problems related to incentives.

However since this is related to purely equity option and related to stock market so there will be a volatility.

1. A SIMPLE

The simple investment option for employee having a fixed rate of return can be use for long term Financial Goal

1. SEP

The A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees' retirement as well as their own retirement savings. Contributions are made to an not dividable Retirement Account or Annuity (IRA) set up for each plan participant. The maximum contribution is 15 percent of an employee's salary or $24,000, whichever is less. The maximum dollar contribution is $42,000. Paperwork is minimal, and you don't have to contribute every year. The catch is, employees don't make any contributions to SEPs. Employers must pay the full cost of the plan, and whatever % you contribute for yourself must be contributed to all eligible employees.

The Again a good option for long term Financial planning however there is a limitation of investment.

1. 401(k)

The A 401(k) Plan can be defined contribution plan where an employee can make contributions from his or her pay check either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan.

1. 403(b)

A 403(b) plan, also called by a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. Individual accounts in a 403(b) plan can be any of the following types. Employees of tax-exempt organizations are eligible to participate in the plan. Participants include teachers, school administrators, professors, government employees, nurses, doctors and librarians

The Profit Sharing Plan

The profit-sharing plan, also called by a deferred profit-sharing plan or DPSP, is a plan that gives employees a share in the profits of a company. Under this type of plan, an employee receives a percentage of a company's profits based on its quarterly or annual earnings.

    9. A Money Purchase Pension Plan

The money-purchase pension plan is a pension plan to which employers and employees make contributions based on a percentage of annual earnings, in accordance with the terms of the plan. Upon retirement, the total pool of capital in the member's account can be used to purchase a lifetime annuity.