Richard Is Trying to Decide Between a Defined Benefit Plan

question 55

Multiple Choice

Richard is trying to decide between a defined benefit plan for retirement and a cash balance plan. Richard is 27 years old, unmarried, and is in an occupation (computer software design) that causes him to move from employer to employer. He has already worked for three companies since he received his bachelor's degree. As his advisor, which plan would you recommend to Richard?

• A) Defined benefit plans are covered by ERISA and guaranteed by the PBGC. This is definitely Richard's best choice.
• B) Defined benefit plans will increase with Richard's tenure in the organization. When he retires, he will have accumulated high benefits.
• C) Cash balance plans pay out lump sums when Richard leaves the company. This will be advantageous to Richard if he continues to change employers frequently throughout his career.
• D) Cash balance plans pay out lump sums for employees who have been with the company a minimum of 20 years. If Richard does not plan to stay with an employer that long, he should go with a defined benefit plan.
• E) The only differences in the two kinds of plans involve the employer's accounting and tax management. It makes no difference to the employee, although it is of great importance for HR benefits managers.

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