Exam (elaborations)
CPFO EXAM – RISK, BENEFITS AND PROCUREMENT EXAM QUESTIONS AND VERIFIED ANSWERS
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CPFO EXAM – RISK, BENEFITS AND PROCUREMENT EXAM QUESTIONS AND VERIFIED ANSWERS...
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CPFO EXAM – RISK, BENEFITS ANDPROCUREMENT EXAM QUESTIONS AND
VERIFIED ANSWERS
How many full-time public employees are covered by defined benefit plans? -
ANSWER Ninety-one percent
How many full-time public employees are covered by defined contribution
plans? - ANSWER nine percent
Prudent-Person Rule - ANSWER Requires each retirement board member to
perform his or her duties as a prudent person would when acting in a like
capacity and in a similar situation.
Defined Benefit Plan - ANSWER Provides for a guaranteed benefit at
retirement using a formula generally based on age, length of service and salary.
Defined Contribution Plan - ANSWER Provides for benefits based on the
assets available in employees' individual accounts.
Defined Benefit Plan - Employer Perspective - ANSWER "Funding Certainty:
Liabilities vary depending on the actuarial assumptions concerning future salary
increases, investment earnings, employee separations and plan experience.
Predictable Costs: Annual contributions vary depending on the year in which
the actuarial assumptions are made. Many plans are funded on the basis of a
fixed rate of contribution determined by statute. Recruitment Tool: Not usually
,portable to another employer, except if both employers are under same umbrella
system. Example = WRS Reward Long-service Employees: Benefits are usually
based on final year(s) of salary. Administrative Expenses: Actuarial valuation,
record keeping, investment management. Investment Risk: Taken by the
employer.
Defined Benefit Plan - Employee View - ANSWER "Benefit Potential:
Benefits paid at retirement are for life and are guaranteed by the plan's formula.
COLAs common. Understanding benefits: Require explanation based on set of
variables. Normally no separate accounts. Access to Assets while Employed:
Normally benefits cannot be withdrawn during active employment. Reward
long-service Employees: Based on final year(s) salary. Recruitment Tool:
Benefits are not portable Investment Risk: Employer assumes the risk.
Defined Contribution Plan - Employer Perspective - ANSWER Funding
Certainty: Employer liability is met each year in that the contributions to
employee accounts are usually fixed as a % of payroll. Predictable Costs:
Annual cash requirements are more predictable as they are based upon a known
% of employee salaries. Recruitment tool: benefits are portable Reward long
service: Benefits depend upon accumulated contributions and earnings earned
Admin Expenses: Lower, as no actuarial valuation required. Employee
education expense and record-keeping possibly higher Investment Risk:
Employee takes the risk.
Defined Contribution Plan - Employee Perspective - ANSWER "Benefit
Potential: Based on contributions and earnings. The final retirement benefit can
be eroded by pre-retirement distributions and inflation. Understanding benefits:
Benefits based on a percentage of salary. No other variables need to be
considered. Each individual has a separate account. Access to Assets while
Employed: Benefits may be withdrawn under certain circumstances eg loans,
death, or disability per IRS guidelines. Rewards long-service employees: Not
really, based on accumulated earnings and contributions.
, Retirement plan funding objectives - ANSWER 1. Stable contribution rates 2.
Eliminate the unfunded accrued liability within a certain timeframe 3. Maintain
intergenerational equity by not passing current costs to future generations 4. Use
techniques to hedge against unexpected adverse experience.
Retirement plan funding methods - ANSWER Level: generate contribution
rates based on a uniform percentage of payroll. Graduated: finances benefits
through increasing the percentage of payroll contribution throughout a person's
career.
Unfunded Accrued Liability (UAL) - ANSWER The difference between the
total liabilities at present and in the future, minus the current assets and the
present value of future normal costs.
Closed Amortization - ANSWER Financing the UAL over a specific number
of years with the number of years declining as each year passes.
Open Amortization - ANSWER Number of years to pay off the UAL may
remain constant from year-to-year.
Three ways in which assets may be valued - ANSWER 1. Book Value: is the
total actual cost of purchasing the assets. 2. Market Value: Values the assets on
a sale basis, and results in the volatility of asset values. 3. Smoothed Market
Value: Recognize only a portion (ie 20%) of the unrealised gains and losses
each year. In this way there is a much 'smoother' asset trend, and it best supports
a funding policy of stable contribution rates over time.
Annuity - ANSWER A stream of fixed periodic payments for a fixed period in
the future or for life.
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