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Defined Contribution Plans
Answers to the questions most frequently asked about the investment,
administration and regulation of Defined Contribution Plans
December, 2001
Table of Contents
Introduction
The Basics of Defined Contribution
Plans
What is a defined contribution plan?
What is a defined benefit plan?
What is the primary difference between
a defined contribution plan and a defined benefit plan?
What are some examples of defined contribution
plans?
What are some key reasons that defined
contribution plans exist?
What are some of the major attractions of
defined contribution plans for employees?
What risks are borne by participants in
defined contribution and defined benefit plans?
How does the risk to the employer differ
with a defined contribution plan vs. a defined benefit plan?
How does participant control of investment
decisions impact the employer?
What is the major plan design consideration
resulting from the regulation of defined contribution plans?
Beyond financial considerations, what
is the burden of defined contribution plans on the employer?
How many participants are there in defined
contribution plans in the U.S.?
What is the size of assets held in
defined contribution plans?
What are "hybrid" plans?
What is the difference between a cash
balance plan and a pension equity plan?
Why would
an employer with an existing defined benefit plan choose a hybrid plan
instead of a defined contribution
plan if a change is contemplated?
What is an ESOP?
What is an ERISA Section 404(c) plan?
Saving for Retirement with Defined Contribution
Plans
What are before and after-tax savings?
How do defined contribution plans grow over
time to provide benefits to participants upon retirement?
How are employee contribution limits set?
What are the withdrawal provisions in a
401(k) plan?
How do loan and withdrawal provisions impact
the risk to the participants?
What types of investment options are typically
offered in a defined contribution savings plan?
What are the costs to participants of
defined contribution plans?
What are 12b-1 fees?
What are redemption fees?
On average, how have plan participants allocated
their defined contribution plan investments?
How should participants allocate their
assets?
Managing and Administering Defined Contribution
Plans
What is the employer's role in managing a defined
contribution plan?
What are the different ways in which employers
set up their investment programs?
What are bundled and unbundled services?
What is the role of the recordkeeper?
What is the role of the trustee / custodian?
How often are investment options priced?
Regulation of Defined
Contribution Plans
What are the primary aspects of defined contribution
plan regulation under ERISA?
Does other legislation and regulation affect
defined contribution plans?
What is a fiduciary?
What are the basic fiduciary standards
for defined contribution and other retirement plans?
What is a prohibited transaction?
Are there exemptions to prohibited transactions?
What sanctions are imposed by ERISA on
fiduciaries that do not meet their responsibilities?
How do funding and vesting provisions
affect plan administration?
What is the basic nondiscrimination rule?
What is the definition of Highly Compensated
Employees (HCEs)?
How does the definition of HCEs relate
to defined contribution plans?
Are there additional nondiscrimination
tests for 401(k) plans?
What are the minimum coverage requirements?
How are contributions regulated?
What are the minimum distribution requirements?
How are distributions taxed and when
do they occur?
What are the additional limitations
on distributions from 401(k) plans?
What are some of the distribution requirements
in an ESOP?
What are the requirements of an ERISA
Section 404(c) plan?
What investment education materials are
allowed to be distributed by employers?
Are the requirements for maintaining
a qualified defined contribution plan static?
Introduction
Defined Contribution Plans are a critical
retirement savings building block for many American workers and their
families. The current and future success of these plans is served
by understanding how they affect the obligations and risks of both employers
and employees.
The Committee on Investment of Employee Benefit Assets (CIEBA) of the
Association for Financial Professionals has published this overview in
an effort to increase the knowledge base of employees, providers and regulators
on these retirement vehicles as they are implemented in the U.S. private
sector.
CIEBA is a nationally recognized voice for those corporate financial
officers who administer and manage, as fiduciaries, the investment of
funds for employee and welfare benefit plans regulated under the Employee
Retirement Income Security Act (ERISA). As of Fall, 2001, CIEBA's
120 members collectively managed $1 trillion in assets for 15 million
participants including both union and non-union employees and retirees
and their beneficiaries.
The Association for Financial Professionals (AFP) in Bethesda, Maryland,
formerly the Treasury Management Association, has grown in the past 20
years into a community of more than 14,000 individuals representing a
broad spectrum of financial disciplines. AFP turns knowledge into
performance by supporting members throughout all stages of their careers
with research, continuing education, career development, professional
certifications, publications, representation to key legislators and regulators,
and the development of industry standards.
CIEBA wishes to thank the Employee Benefit Research Institute (EBRI),
the Groom Law Group and Bernstein Research for providing portions of the
supporting data in this publication
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