Question

List six reasons why some employers establish income replacement objectives that generate less than 100 percent of full preretirement gross income

Answer 1

1.Most employer-sponsored pension plans are qualified, meaning they meet Internal Revenue Code 401(a) and Employee Retirement Income Security Act of 1974 (ERISA) requirements. That gives them their tax-advantaged status. Employers get a tax break on the contributions they make to the plan for their employees. So do employees: Contributions they make to the plan come "off the top" of their paychecks – that is, are taken out of their gross income. That effectively reduces their taxable income, and, in turn, the amount they owe the IRS come April 15. Funds placed in a retirement account then grow at a tax-deferred rate, meaning no tax is due on them as long as they remain in the account. Both types of plans allow the worker to defer tax on the retirement plan’s earnings until withdrawals begin, and this tax treatment allows the employee to reinvest dividend income, interest income and capital gains, which generates a much higher rate of return before retirement.

2.A pension fund provides a fixed, preset benefit for employees upon retirement, helping workers plan their future spending.

3.benefits do not depend on asset returns, benefits remain stable in a changing economic climate.

4.Businesses can contribute more money to a pension fund and deduct more from their taxes than with a defined-contribution plan.

5.. A pension fund helps subsidize early retirement for promoting specific business strategies. However, a pension plan is more complex and costly to establish and maintain than other retirement plans

6.Employees have no control over investment decisions. In addition, an excise tax applies if the minimum contribution requirement is not satisfied or if excess contributions are made to the plan.