Deck 29: Pension Plan Management

Question 1

Which of the following statements about pension plan portfolio performance is incorrect?

A) Pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.
B) Alpha analysis, which relies on the Capital Asset Pricing Model, considers the risk of the portfolio when measuring performance.
C) Peer comparison examines the relative performance of portfolio managers with similar investment objectives.
D) A portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.
E) In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.

Answer 1

E

Question 2

The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio. One way to incorporate risk into performance measurement is to examine the portfolio's alpha, which measures the vertical distance of the portfolio's return above or below the Security Market Line.

Answer 2

True

Question 3

From a pure cost standpoint, a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.

Answer 3

True

Question 4

The Ritz Company has a 40-year-old employee that will retire at age 60 and live to age 75. The firm has promised a retirement income of $20,000 at the end of each year following retirement until death. The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits. What is Ritz's annual pension contribution to the nearest dollar for this employee? (Assume certainty and end-of-year cash flows.)

A) $2,756
B) $3,642
C) $4,443
D) $4,967
E) $5,491

Question 5

If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.

Question 6

The Apex Company has just hired Mr. Smith, who is age 25 and is expected to retire at age 60. Mr. Smith's current salary is $30,000 per year, but his wages are expected to increase by 5 percent annually over the next 35 years. Apex has a defined benefit pension plan in which workers receive
2 percent of their final year's wages for each year of employment. Assume a world of certainty. Further, assume that all payments occur at year-end. What is Mr. Smith's expected annual retirement benefit, rounded to the nearest thousands of dollars?

A) $ 35,000
B) $ 57,000
C) $ 89,000
D) $116,000
E) $132,000

Question 7

Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.

Question 8

Which of the following statements about pension plans if any, is
Incorrect?

A) A defined contribution plan is, in effect, a savings plan that is funded by employers, although many plans also permit additional contributions by employees.
B) Under a defined benefit plan, the employer agrees to give retirees a specifically defined benefit, such as $500 per month or 50 percent of the employee's final salary.
C) A portable pension plan is one that an employee can carry from one employer to another.
D) An employer's obligation is satisfied under a defined contribution plan when it makes the required contributions to the plan. The risk of inadequate investment returns is borne by the employee.
E) If assets exceed the present value of benefits, the pension plan is fully funded.

Question 9

Midwest Investment Consultants (MIC) operates several stock investment portfolios that are used by firms for investment of pension plan assets. Last year, one portfolio had a realized return of 12.6 percent and a beta coefficient of 1.15. The average T-bond rate was 7 percent and the realized rate of return on the S&P 500 was 12 percent. What was the portfolio's alpha?

A) -0.75%
B) -0.15%
C) 0%
D) 0.15%
E) 0.75%