401 (K)

This text is designed to provide accurate information in regard to the subject matter covered. The readers of this book understand that the author and CRNTC are not engaged in rendering legal or financial services. You should seek competent tax or legal advice with respect to any and all matters pertaining to the subject covered in this book This book is updated periodically to reflect changes in laws and regulations. Copyrights 2003 Mark Coleman – Author All rights reserved. This book, or any part thereof, may not be reproduced in any manner without permission from the author. Printed in the USA First printing, June 2003

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In the back of this book is a 50-question examination sheet that is to be completed by students who seek continuing education credits. A grade of 70 percent or higher is required to receive continuing education credits. You are to place your answers on the answer sheet that is included in back of this text. Please fax your personal profile and your answer sheet to the following number: 1-410-734-7966 or 1-410-298-5239 YOU CAN ALSO TAKE THE TEST ON-LINE BY CLICKING ON THE FOLLOWING TEST-SITE: http://www.colemantesting.com/

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The following are key terms agents should know about 401(k) plans. Plan participants - These are the employees who have signed up for the employer’s 401(K) retirement plan. Rights under ERISA Participants in the Plan are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all Plan Participants shall be entitled to the following.

1. Receive information about their Plan and Benefits 2. People who operate the Plan have a fiduciary responsibility to

carryout their duties in a prudent manner, for the benefit of the Plan Participants and Beneficiaries.

3. If a claim for benefit is denied or ignored, the Plan member has a right to know why, obtain copies of documents relating to the decision without charge, and to appeal any denial.

4. Assistance with questions pertaining to the 401(K) Plan Sponsor - The employee’s employer is the sponsor.

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The sponsor decides how the plan will be operated. The employer (sponsor) will design the plan and make the rules. In addition to following their own bylaws, the sponsor must abide by rules enforced by government regulatory agencies. The rules are over-seen by the IRS, Dept. of Labor (DOL), and the Pension Benefit Guaranty Corp. (PBGC). It is up to the sponsor to decide which stocks, mutual funds, money market funds, and other investment options to offer members. It is entirely up to the employer to decide such things as loan options, hardship, withdrawal etc. Trustee- The trustee’s responsibility is to protect the plan participant’s assets and to oversee the plan. The trustee can be an individual or group. With large corporations it is usually a professional organization. The plan’s assets are separated from the company. The separation is important because it safe-guards the plan assets from creditors if the company goes bankrupt. The Trustee’s role is to see that the plan is run for the benefit of plan members. This will include making sure that the investment manager’s decisions are in the best interest of the members. Other duties and responsibilities of the Trustee

1. making quarterly and annual reports of the Plan’s Account activities and the value of each member’s account

2. have the Trust and its assets be audited at least

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annually by a certified public accountant. 3. make available to employees a copy of the annual audit

Plan Administrator-This person is responsible for answering any questions about the 401(k) plan. He may be an employee of the company or an outside firm. Investment Managers-This financial professional is responsible for the daily buying and selling of stocks, bonds, and other securities for the fund. The investment managers are typically large mutual fund companies, banks, or insurance companies. The investment manager’s daily trades must conform to the investment objectives of the funds he is managing. Investment Managers’ Written Agreement The appointment of an investment manager shall be in writing between the Employer and the investment manager. A copy of the agreement must also be given to the Trustee. The agreement shall set forth the effective date of the investment manager’s appointment and an acknowledgment by the investment manager that he is a Fiduciary of the 401 (K) Plan under ERISA.

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Record Keeper-The record keeper keeps track of the plan member’s account-contributions, balances, loans and withdrawals. The record keeper will maintain separate records for plan participants’ accounts and deliver quarterly statements showing the following:

1. Contributions made to the account during the period and total year-to- date contributions

2. Account earnings for the period 3. Account fee paid during the period 4. Total value of the account at the end of the period

The annual statements will also show:

1. Rate of return on investments 2. Information on the maximum contribution limit 3. Information on how to obtain a prospectus and other

disclosures of all fees and expenses associated with mutual funds and other investments made by the Plan

Monitoring which employees are participating in the plan and those employees who are not participating in the plan is another duty of the record keeper. This is required by Federal Law. Bonding – ERISA Requirements Every Fiduciary and every person who handles funds or other property of the Plan shall be bonded in accordance with Section 412 of ERISA for the purposes of protecting the Plan against loss by reason of acts of fraud or

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dishonesty on the part of the person, group or class, alone or in connivance with others, to be covered by such bond. No bond shall be less than $ 1,000 nor more than $ 500,000 except that the Secretary of Labor shall have the right to prescribe an amount in $ 500,000. EGTRRA OF 2001 PENSION REFORM PROVISIONS The Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA) made numerous changes to ERISA and related benefit laws. The new law incorporated many of the pension reform provisions that had been proposed for several years but had not been enacted. Important changes include: * Increases in the benefit and contribution limits for most most retirement plans • An increase in the amount that employees may defer from

Pay for 401 (k) plan contributions. • Faster vesting requirements for employers matching contributions to 401 (k) plans • The option of providing 401 (K) catch-up contributions for older workers. • Simpler nondiscrimination testing for 401 (k) plans.

* Additional disclosure requirements on the impact of plan amendments that reduce benefits.

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• Tax credits to encourage low-income employees to make contributions to retirement plans. • Expansion and easing of the rules governing rollovers of Distributions between various types of tax-favored Retirement plans. • Employers tax credits for plan start-up costs to encourage the adoption of new retirement plans. • A wavier of IRS determination letter user fees for small employers.

Incentives for small employers EGTRRA included provisions designed to encourage small employers to sponsor retirement plans, including a tax credit for plan start-up costs and a determination letter fee waiver. Stat-up costs tax credit. Internal Revenue Code Sec. 45E provides for an annual $ 500 tax credit to offset a small employer’s plan start-up costs during the first three year’s of a plan’s operation. Because many small employers have low profits, the tax deduction available for plan administrative cost often has little or limited value. The $ 500 tax credit, however, will get subtracted right off the employer’s tax bill. Costs that exceed the credit may then be deducted. The credit is effective for costs incurred after 2001 for plans established after that year and is available to employers that, in the preceding year, did not employ more than 100 employees who had compensation of more than $ 5,000. The credit is not available to an employer who sponsored a retirement plan during the

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three tax years proceeding the first tax year for which the credit would apply. The new plan must have at one employee eligible to participate who is not a highly compensated employee. The credit allowed each year is equal to 50 percent of “qualified start-up costs,” which include ordinary and necessary expenses paid or incurred to establish or administer a plan and to provide retirement-related education to employees with respect to the plan Fee waivers. EGTRRA also bars the IRS from charging user fees for determination letter requests made before the end of the fifth plan year that a small employer plan is in existence or the end of any remedial amendment period beginning within the first five plan years. The cost and paperwork involved in obtaining initial determination letters are a major disincentive for small employers. These fees can range from $ 125 to $ 1,250. The fee waiver is limited to employers who did not employ more than 100 employees who had compensation of more than $ 5,000 and to plans that have at least one employee eligible to participate who is not a highly compensated employee.

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Agents should thoroughly understand that their clients will probably have an undue fear of losing their 401(K) investment over the short term. This is the single most harmful element of 401(k) investing, the fear of taking investment risks. First, risk is inherent in every investment and needs to be managed, not avoided. Second, risk has broader meaning than just loss of principal. Most notably, the risk of loss of purchasing power is equally important in a 401 (k), because of the long-term nature of the investment enterprise. This book provides a methodology for investment selection that embraces risk instead of avoiding it. Hopefully, this book will aide the insurance producers in assisting their clients with important 401(k) matters. 401(K) Tax Advantages The amounts set aside in a 401(k)’s pretax account are not included in the W-2 for current income tax purposes. The benefits are twofold. First, the client is getting a tax break; income taxes will be lower after enrollment. Second, because the client is investing income that was earned but was not reduced by taxes, the client is ahead of

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any other investor or possible alternative investment or savings account that might be considered. Plan Participants are allowed to contributed up to $13,000 in 2003 – as long as it is no more than 25 percent of the plan participant’s salary. Contributions are deducted automatically from the employee’s paycheck. Continuing Tax Advantages When the clients invest on their own through a broker or mutual fund, or save at a bank, they will each receive a statement (form 1099) showing the amount of interest, dividends, or capital gains subject to income or capital gains taxes. Each year, these amounts need to be reported on the client’s income tax returns and federal and state taxes may be due. Because of the special tax treatment of 401(k)’s the client will not get a yearly 1099 for his or her 401(k), and therefore will not have to report to the IRS any interest, dividends, or capital gains earned in that year. These amounts do not have to be reported until they have been withdrawn from the 401(k), which is normally at retirement. The advantage of not paying current taxes on the growth of a 401(k) will create the possibility of faster “compounding”. Faster compounding is achieved when earnings are reinvested without reduction for income taxes. Participation Bonus

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Many employers will pay a bonus into the client’s 401(k) just for participating. The employer’s contribution is not currently taxed. Prescreened Invested Options to Choose From Employer’s 401(k) plan must offer a selection of investment options for the participating employees. With a prescreened list of possible choices, the employee’s job as an investor becomes much less daunting and should be much more manageable. Employee’s payroll deductions Employers make saving with a 401(k) easy. They deduct 401(k) contributions from the employee’s paycheck, making saving for the future almost painless. What is a 401(k) Plan? The 401(k) is a section of the Internal Revenue Code dealing with benefits plans offered by employers to their employees. Under these plans, employers may offer savings plans for eligible employees in before-tax and after-tax dollars, with tax-deferral benefits, company matches, profit sharing, loan provisions and a number of

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different investment options for the employee to choose from. The 401(k) is offered to employees of small, medium and large companies. The 401(k) gives the workers the power to control their retirement income; the traditional pension plan does not. With a traditional defined benefit plan, the employer funds the plan and at retirement the pension pays the retiree a monthly check. The amount is usually a percentage of the employee’s earnings. Most corporate pensions do not have a cost of living adjustment. Therefore it will not increase if inflation increases. For a long time, the impact of inflation on pension payments was of little concern to retirees. Now they are living longer and the possibility of out-living their income is becoming a concern. Since 1926, inflation has averaged 3% per year. 401(k) participants should view themselves as long-term investors. Their investment options will usually be limited to the investment options the employer has selected for the plan. Typically, the employees will have a number of mutual funds to choose from, a money market fund and possibly the company’s stock. A 401(k) can supplement other sources of retirement income, or it can fully fill the gap between what will be needed and what will be received from Social Security and pensions. Advantages of a 401(k) Plan

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Retirees will need a large asset base to create a sufficient income stream for 20, 30, or more years. Agents need to stress this point to clients and prospects. Generally, most plans provide the following seven key features, some of which are essential and some are optional. 401(k) participants will have to read their plan summary or plan document to determine the characteristics of the plan their company provides. Employees Pretax Contribution The eligible employee is allowed to make pretax contributions to the 401(k) plan through payroll deductions. All plans must provide for directions from the employee to the employer to deduct a certain percentage or dollar amount of the employee’s earnings, to fund the 401(k) account. The amounts will appear on a statement issued to the employee by the plan administrator. Some plans also allow the eligible employee to direct the employer to place a certain percentage of his after-tax earnings in a after-tax 401(k) account. Company Match

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Many companies match the employee’s pretax or after-tax contributions, or both, partially, fully, or more. The employer contributions shall be delivered to the Trustee no later than the due date for filing the Employer’s income tax return. Investment Choices The main purpose of a 401(k) to employees is to help them invest for the future. Almost every plan provides a selection of investment options for the employee to choose from. Loans Some plans allow the employee to borrow from his account. If this is allowed, the plan must be repaid within five years, unless the loan is for the purchase of a principle residence. The employee will also be required to pay interest on the loan amount. Often the investor must shift the amount of funds he or she wants to borrow into an extremely conservative investment option, such as a guaranteed investment contract (GIC), for the duration of

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the loan. The company will insist that the borrower repay the loan through regular payroll deductions. The investor may repay the loan amount in full at anytime. Withdrawals The 401(k) is a retirement plan and administrators are generally prohibited from disbursing funds before that time. Plans provide for exceptions in the case of financial hardship. Distributions are also allowed at retirement, death, disability, and change of employment. If the employee leaves the company before age 55, withdrawals are taxed and generally hit with a 10% penalty, unless withdrawal money is rolled over into an IRA or another employer’s 401(k). The employee determines how much to set aside from his earnings in his 401(k) account. The pretax contribution is called an “elective” or a “salary reduction”. When the employee decides to participate in the plan, he will be asked to complete an enrollment form that directs the employer to make deductions from the employee’s earnings. The contribution will then be placed into the employee’s 401(k) account. Five things will happen when the employee sends in the enrollment form. First, the employee’s payroll department is notified to reduce the employee’s paychecks in the appropriate amount. Second, the money is sent to the 401(k) custodian, who places the money into a special pretax account in the employee’s

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name. Third, the payroll department makes a notation that these amounts are properly reported on the employee’s W-2. This is necessary so that the employee will not have to pay income tax on that amount at the end of the year. Fourth, if the employer plan provides for a company match, the administrator of the plan calculates the amount of the match based on the amount of the employee’s contribution. Fifth, the employee’s funds are invested according to the employee’s directions. Generally, the employee is allowed to set aside at least one percent of his annual compensation. The majority of plans allow the employees to make pretax contributions from one percent to ten percent of his annual compensation. The employer is responsible for making certain that pretax contributions do not exceed legal limits. The administration of the plan performs what is called “discrimination tests” on the plan periodically to determine that the maximums are not exceeded. Should the problem of excess contributions arise, a portion of the employee’s contribution will be refunded to the employee by the administrator. Employee’s pretax contributions are fully and immediately vested and fully and immediately portable. This means the employee’s account belongs to him. Should the employee die, the account will go to his named beneficiary. Employees should update information on the named beneficiary on a periodic base. Should the employee

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leave the employer, he can take his 401(k) account with him. After – Tax Contributions Some 401(k) Plans allow the employee to place a certain percentage of their after-tax earnings in an after-tax 401(k) account. These after-tax contributions do have tax-deferral benefits, and some employers match the employee’s contributions to these accounts. Sometimes employers will reduce their match amount to the pre-tax 401(k) account if they are also matching contributions in the after tax account. Withdrawals of pre-tax accounts are restricted by law. Withdrawals of after-tax 401(k) accounts are determined by the provisions of the company’s plan. Borrowing from a 401(k) Account The employer will determine whether or not the employees can borrow from their 401(k) accounts. This information can be found in the Plan’s summary plan description booklet. This is the rule book for the plan. Things to know about loans The loan must be repaid with interest. Typically, the employee will have to pay one or two percentage points above the prime rate. Generally, as much as half of the money in the employee’s account may be borrowed, up to $50,000. Some plans allow up to 100%, with a $50,000

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maximum. The loan must be repaid within five years unless it’s for purchasing a principal home. If it is for a principle home, then the employee has up to 30 years to repay the loan. Most plans will let the employee borrow for any reason. The following are the advantages and disadvantages of borrowing from a 401(k) account. Advantages of Borrowing

• Obtaining a loan is easy. • It usually takes just a few days to get the loan. • Getting an employee’s credit report is not necessary. • All interest the employee pays for the loan is credit to

the employee’s account. In other words, the employee is repaying the loan to himself with interest.

• The interest rate will be typically lower than what a bank would charge for a personal loan

Disadvantages of Borrowing Fees – A lot of 401(k) plans charge an application fee when the employees borrow from their account. Some will even charge a service fee for keeping track of the loan on a yearly basis. The loan application fee may range from $5 to $100 or more.

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Lost of Future Earnings One of the most serious reasons for not borrowing from a 401(k) account is that the employee will lose future earnings that may have been previously enjoyed. Paying extra Taxes Although the plan participants’ contributions to the 401(k) account are with pre-taxed dollars the loan will be repaid with after-tax money. Defaulting on the Loan If the employee defaults on the loan, the IRS will treat the entire unpaid balance as a withdrawal. The plan participant will have to pay taxes on the unpaid amount and even a 10% penalty if the employee is younger than 591/2. Guidelines for Borrowing Employees should not borrow from their 401(k) account * If they will be unable to continue making regular contributions

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• Unable to pay the loan payments • Will not be able to pay off the loan right away if laid

off or quits Hardship Withdrawal The IRS requires 401(k) participants to have a compelling reason for making a hardship withdrawal. The government defines this financial hardship as “an immediate and heavy financial need.” The following are types of expenses that qualify:

• Purchasing a principal residence. • The plan participant’s down payment on a primary

home qualifies, but not the monthly mortgage. • Qualified medical expense that exceeds 7.5 percent of

the employee’s adjusted gross income. The medical expenses can be for the employee, his spouse or dependent children.

• Paying post high school expenses for tuition,

educational fees, and room and board. These expenses can be either the employee’s, his spouse, or dependent children.

• Eviction from the plan participant’s home. The IRS will allow the employee to make a withdrawal from

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his 401(k) account to pay the mortgage to prevent eviction or foreclosure.

The IRS expects the plan participant to exhaust all financial resources before making a hardship withdrawal. The amount being withdrawn can not exceed what is necessary to cover the emergency. Employees can not withdraw more than what they have in their account. The plan administrator is required by law to withhold 20% of what ever the employee withdraws as a down payment against taxes. If the plan participant is younger than 591/2 he may be hit with a 10% early-withdrawal penalty. If the employer qualifies for a hardship withdrawal, he may be denied making contributions to his 401(k) for a certain time period. Therefore, hardship withdrawal should be taken seriously. The main purpose for a 401(k) is for retirement. Some plans do not allow employees to make a hardship withdrawal. Plan participants should read their summary plan description booklet to see if their plan permits hardship withdrawals, how to qualify and what are the advantages and disadvantages. Portability of 401(k) Plans One of the biggest differences between a 401(k) plan and traditional pension plans is what happens if the employee leaves his job.

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With a 401(k) plan, the employee’s contributions are always vested. If he decides to terminate his employment, all monies he put into the 401(k) account belongs to him. This is true even if the plan participant decides to leave the account inside the previous employer’s plan, roll it over into an IRA (individual retirement account), or transfer the account to the new employer’s plan (if the new plan allows that). A pension plan, such as defined benefit plans are retirement programs funded by an employer. Employees do not make contributions and an individual account is not set-up in the plan. Employees will receive a check once a month for the rest of their life after retirement. The amount of the retirement check will be based on the following:

• Age at retirement. • Employee’s pay (employers usually average the last three to five earnings). • Years of service • The plan’s formula (usually some percentage of

earnings). If the employee decides to leave his job, he may or may not receive a retirement check once he reaches the age of retirement, usually age 65. With a traditional pension plan, usually an employee must have at least ten years of service with his employer in order to be entitled to a retirement check.

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One of the biggest advantages a 401(k) plan has over the traditional pension plan is that it gives the employee a better chance of fighting inflation. The plan participant may be able to invest the 401(k) funds so it grows faster than inflation, which is currently 3% per year. Managing and Understanding Risk Most people believe that short-term stock market losses are the only investment risk they have to be concerned with when investing. There are a number of risks associated with investing that can cause the plan participant to fail to meet his 401(k) objectives, they are:

1. Adviser Risk – Adviser risk is the risk of receiving bad advice from the investment managers of the fund Employers are required to screen investment managers of the fund. Plan participants can reasonably rely on the investment manager’s advice. They should not turn to their human resources department, their boss, or friends for advice on how to Invest their 401(k) contributions. By doing so, the employee would be exposing himself to adviser risk. 2. Market Risk – Market risk is the risk the plan participant takes when investing in the stock market. Results of long-term investing in the stock and bond markets can be predictable, but short term results are not. Since 1926 the average return in the stock market has been 10% and about 6% for the bond

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market. Plan participants must understand that they might lose all funds in their 401(k) account (Remember Enron Corp. in 2002), but the likelihood of that happening is minimum if they invest for the long haul and diversify their investments. Credit Risk – Credit risk is when the plan participant invests in an individual company’s stocks and bonds. The market value of those securities will increase and decrease over time depending on the follow factors: • Competition from domestic and foreign companies in the same business. • Competent or inept company’s management • Changes and improvement in technology • Market share the Company has for its goods and

services. • Any other good or bad events in the company’s life

that are reflected in the price of its stocks and bonds. Credit risk extends to buying the company’s stock or receiving stock of the company through a company’s match contribution program. The employee’s company stock is not diversified and therefore may be more volatile than a diversified portfolio. Plan participants may need to diversify their contributions and other holdings to reduce credit risk if their company is matching the employee’s contributions with company’s stock.

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Inflation Risk – Inflation risk is the risk that the investments in a 401(k) account do not keep pace with inflation. History has indicated that the plan participant’s investment must earn at least 3% per year to keep pace with inflation. If it does not, then the purchasing power of the investment will decrease over time. Most experts believe that during both pre-retirement and post-retirement investors should still have a certain percentage of their retirement funds invested in stocks or stock funds. Stocks have been a good fighter against inflation since 1926. Tax & Penalties Risk – Tax risk is the risk the plan participant assumes when taking a loan or making withdrawals. Properly managing loans and withdrawals correctly will protect the investor from the risk of loss due to taxes and penalties. Maximizing Compounding Contribution Questions

1. What are the minimum and maximum amounts a plan participant may contribute before taxes? 2. What are the minimum and maximum amounts that may be contributed after taxes? 3. Is there a company match or contribution?

4. How much does the plan participant need to contribute to maximize the company match?

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Answer: Answers for questions 1,2 and 3 can be obtained from the company’s human resource department, personnel or retirement benefits officer. Employees are given a booklet that summarizes the features of the 401(k) plan in writing. In order to answer question 4, the plan participant must read the booklet to proceed. The answers to questions 1 through 4 will help the investor figure out how much he needs to maximize his 401(k) plan.

Portfolio Strategy The secret to managing an investment portfolio is understanding that there are three phases of 401(k) investing, and each is governed by a different set of investment goals and objectives. The three 401(k) phases are accumulation, rebalancing and withdrawal. The Accumulation Phase After the employee has enrolled in the company’s 401(k) and begins to participate, he has begun the accumulation phase. The purpose of this phase is to accumulate assets through capital appreciation, funding, dividend

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reinvestment or interest. In the accumulation phase the primary investment objective is to grow capital. The length of the accumulation phase will vary depending on the investor’s age and when he expects to retire. The Rebalancing Phase The rebalancing phase prepares the plan participant’s account to switch from a capital appreciation portfolio to an income producing portfolio. Normally this phase should last three to four years before the withdrawals begin. Here the investor is simply selling stocks in his account to purchase income producing blue chip bonds. Hopefully this three to four year period will allow the investor to sell his stock when the market is up rather than down. The Withdrawal Phase The last phase is the withdrawal phase. This phase usually lasts 20 to 30 years or longer. It can begin as early as 59 ½ without early withdrawal penalties. In retirement the investor’s primary investment objective is to produce income to last the rest of his life. Each plan will give the plan member various investment options to choose from. The following is a typical list of investment options based on volatility, from least volatile to most volatile. The employer of the plan will determine

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how many of these selections will be made available to the plan participants.

1. Money market fund 2. Guaranteed investment contract 3. Short-term and intermediate bond fund 4. balanced funds 5. Long-term bond funds 6. Growth funds 7. Company stock Explanation of the Plan’s Investment Options Money market fund – This type of fund sells its shares to investor’s and uses the proceeds to purchase short-term, high quality securities such as Treasury bills, commercial paper, and negotiable certificates of deposits. The shareholders receive income from the fund in the form of additional shares of stock in the fund (normally priced at $1 each). No fees are charged to purchase or redeem shares in a money market fund, but an annual management fee is levied by the fund’s investment advisors. Money market funds are relatively safe, liquid and marketable. When the plan participant selects a money market fund for his 401(k) account, he is assured of not losing his investment. The insurance company guarantees the investment and also a fixed rate of return.

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Guaranteed Investment Contracts (GIC) What makes GIC’s attractive to plan participants?

1. The investment has both a stable and high rate of return. 2. The plan participants are usually not charged a fee

when they make withdrawals. 3. The plan member does not have to worry about his 401(k) account losing its value due to market volatility. Short-term bond funds These funds come in both taxable and tax-free varieties. Fund managers buy bonds with maturity dates no longer than ten years, and usually as short five years. Bond funds’ prices usually remain stable because short term bonds fluctuate in price far less than long term bonds. Many investors use these funds as an alternative to money-market funds because they offer check writing privileges and usually earn high yields. Unlike money market funds, e bond funds values will fluctuate and will fall if interest rates rise sharply.

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Balance fund This type of fund spreads its investments among stocks and bonds. The balance fund portfolio will usually achieve moderate income and moderate capital growth for the investor. Long term bond funds These funds concentrate on buying and selling bonds that mature within 10 to 30 years. The investment objective of the fund is to provide long term income for the investor. The fund usually sends a monthly check to the investor. Long term bond funds are made up of hundreds of different bonds with a variety of maturity dates. Growth funds Growth funds primary goals are long term capital gains. Here the investor will have an opportunity for large gains over time, but may experience significant declines and appreciation of his 401(k) account during bull and bear markets. This type of fund is mostly suited for individuals who will not need to withdraw funds for a long period of time. Company stock Sometimes plan participants are allowed to purchase company’s stock for their 401(k) accounts. Here the

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individuals should take into consideration the following factors before buying the stock.

1. The future outlook of the company 2. The financial soundness of the company 3. The quality of management 4. The risk tolerance of the individual

Experts believe that a company’s stock should make up no more than 10% of the investor’s 401(k) portfolio. Remember Enron Corporation. Preferred Stock What are preferred stocks? Preferred stocks are company’s shares that pay out a fixed-rate dividend to share holders. The dividends are first distributed to preferred stockholders and then to owners of common stock. If the company of preferred stock goes bankrupt, the claims of the preferred shareholders take priority over owners of common stock. Preferred stocks act more like bonds than stocks. New issues of preferred stocks are sold at their face value, often at $25 to $100 a share. Investors usually purchase them for income, and not for capital appreciation. Older preferred share usually have no maturity date, while newer issues mature in 30 to 50 years.

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If the investors of preferred stocks want to sell their securities before the maturity date, they will likely have to sell them in the open market. The price they will get for their preferred stocks will depend on where interest rates are currently. Interest rate risk is one of the biggest risks of preferred shareholders. If interest rates go up, the price of preferred stocks and bonds will decline. But if rates fall, the value of these investments will rise. Advantages Investors who believe interest rates will stay stable or decline should consider purchasing preferred stocks. Remember, when interest rates decline the value of the preferred stocks will usually rise. Disadvantages Investors should not purchase preferred stock if they believe the economy is going to improve and interest rates will go up. Other Important Facts: Preferred stocks are usually issued by blue chip corporations, utilities, and banks. Approximately 1,600 American companies offer preferred stock to investors. Credit Rating To reduce the risk of a company going bankrupt and defaulting, experts believe investors should buy investment graded preferred stock. Investment grade is limited to those companies graded BBB and above by the rating agencies. The two major rating agencies are Moody’s Investor Services and Standard & Poor’s Corporation. Call Date

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Some preferred stocks have a “call” date. This is the date the issuer may repurchase the stock at a specific price, usually at par value or slightly above. Companies will generally “call” their preferred stockholders if interest rates fall and they want to eliminate high dividend payout. Experts believe that investors will fair better by purchasing preferred stock with a “call” date of three to five years. Taxes Dividends on preferred stock are usually paid quarterly, but the issuer is under no obligation to pay dividends unless they have declared a dividend payout. Under current law, dividend income is taxed at a rate of 15 percent. Investor’s regular income tax rate can be as high as 35 percent. Diversification Investors who purchase preferred stocks should make sure their holdings are diversified. Some experts suggest owning at least 10 preferred stocks from different companies and industries. Company stock made up about 42 percent of all 401(K) accounts in 2002. This is surprising due to the debacles of

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large corporations such as, Enron, Kmart, and MCI World Com. Some companies are implementing new changes to increase employees participation in 401(K) Plans and investment performance. Both agents and plan participants should be aware of the following new programs that employers are making to 401(K) s. 1. Lifestyle funds: This mutual fund will adjust automatically according to the worker’s age. It will start out heavy in stocks and gradually move towards fixed-income as the employee gets closer to retirement. 2. Automatic Enrollment: New workers are placed into the company’s 401(K) Plan automatically unless they opt out of it. 3. Escalating Contributions: The workers agree upfront to have their contributions increased automatically over time so that they end up making higher contributions as they become older. After the investor has reviewed his investment options and assessed his financial goals, he should have a good feel for how he might invest his 401(k) money. Reading financial reports and following performance in different types of markets will help the investor become more familiar with the technique of investing.

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Education and Financial Advice Sometimes the plan will hire an outside company to provide investment advice to plan members. Plan members can get information about their individual accounts and advice about how to invest their money by visiting the financial advisor’s website. The plan company will provide this service so that the plan members will be able to obtain specific advice about their concerns. Another reason is for the plan to protect itself from legal responsibility for what happens to employees investments. Safe Harbor Rule Section 404(c) refers to a section of the Employee Retirement Income Security Act (ERISA). This is one of the key laws that govern employers’ retirement plans. Section 404(c) tells companies what they must do to reduce the possibility of being liable for plan members’ investment losses. The plan must give the plan participant enough power over his 40(k) account so that he will be able to properly manage the account. Companies must meet the following standards. 1. Control – give the plan member authority over his or her investments.

2. Information- Provide the plan member enough accurate and adequate information to make an informed investment decision. 3. Choice- offer to the plan member a wide selection of investments. Each selection should have different

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degrees of investment risk. 4. Maneuverability- The plan must allow plan participants to switch from one investment to another.

What do these rules mean? 1. The plan participant must be given at least three investment alternatives. Each should have different risk-and-reward features. 2. Plan members must be given investment instructions at least every three months, on their investment selections. 3. Plan members must be given an opportunity to

switch from volatile or risky investments into a safer investment.

Technology is helping plan administrators Technology is making it easier for employers to provide employees with information about their 410(k) retirement program. Through technology, most plans are now able to furnish easier- to-understand information about how the plan works and about the plan member’s 401(k) account. Employees can simply go to their human resources department to get literature on the plan.

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Fees Most of the administrative cost of running a 401(k) plan is generally paid by the plan itself. But more and more plans are gradually shifting these costs to plan participants. Plan members should know and understand exactly how much money their 401(k) account earned each year and how much they had to paid in fees and expenses. This information can be found in the plan’s prospectus which can be obtained from the administrator of the plan. Two Schools Of Thought

Buy and hold- This theory requires the investor to invest in the best performing, most steady growth funds offered by the company’s 401(k) plan. The plan participant is expected to stick with these investments through up and down markets. Buy and hold is a simple strategy that removes the decision making process from the investor. With this method, the investor is not concerned about timing the market. He should buy good quality funds and hold on to them for the long haul. • Asset Allocation – This strategy is a little more complicated. The plan member will have to determine how to allocate his assets

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among the many investment options offered by the plan. The first step is to decide how to distribute the account’s assets among stocks, bonds, and cash. Then the investor must re-arrange his 401(k) portfolio to mirror that allocation. For example, the plan member may believes that he needs to keep 50 percent of his assets in stock funds, 40 percent in in bonds funds, and 10 percent in cash, such as money market funds. These suggestions only broadly outline a strategy to maximize the investor’s 401(k) assets throughout his career. The precise allocation of assets will greatly depend on interest rates, stock and bond prices, and the outlook for the economy. For example, if interest rates are declining, more money might be used to buy stock funds. On the other hand, if interest rates are rising, it may be wise to pull some money out of stocks and invest it in GIC’s and money market funds. Generally speaking, the investor should take more risk with his money when he is young and able to bounce back from temporary declines in the stock market. As he nears retirement, he should scale back from stock funds and buy more stable income bond funds.

Special things to consider

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Changing Jobs There are three important 401(k) issues the plan member needs to understand if he is thinking about changing jobs. These issues are (1) vesting, (2) required distributions, (3) outstanding loans, if any. Vesting – The investor needs to assure himself that he is fully vested with the company’s matching program. Employees will not be allowed to take unvested amounts with them if they leave the company. Required Distributions- Sometimes the employer of the plan will mandate that the employee’s 401(k) account be paid or distributed to them when they leave the employment of the company. Fortunately, the IRS early withdrawal penalties (10%) will not apply if the employee is not under the age of 55. But the company must withhold 20% of the distribution for withholding tax purposes. To avoid the 20% withholding, the employee can apt to transfer or roll over his 401(k) assets in another qualified retirement account.

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ESTATE PLANNING

After the plan participant’s death, his pre-tax account, his after-tax account, and his vested contributions will be paid to his beneficiary, less loan balances. There are three types of taxes that apply to a deceased plan member. First, an income tax would be due in the full amount of the distribution to the beneficiary. This amount will be taxed at the beneficiary’s tax rate as income. If the plan member dies before age 70 1/2, the beneficiary can delay the date of receipt for up to five years. Therefore, the beneficiary can delay his income tax liability up to five years. If the deceased designates a natural person as beneficiary, his beneficiary may elect to receive distribution over his or her lifetime. The beneficiary must use the IRS actuarial tables when determining the annual distributions. If the beneficiary is a surviving spouse, he or she will have the option of rolling over the 401(k) into his or her IRA. This will allow the surviving spouse to continue tax deferral on the rollover amount. If he or she takes a distribution, either in a lump sum or in periodic payments, the distribution will be fully taxable as income at the beneficiary’s tax rate when received.

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Clearly one of the most important estate planning issues is the designation of a beneficiary of the 401(k) assets. The plan member usually makes the designation when he first begins participating in the 401(k) retirement program. The estate tax marital deduction is generally available if the designated beneficiary is the member’s spouse. Therefore, the 401(k) benefits will not be subjected to estate taxes. Plan members should seek competent counsel from an estate attorney regarding his 401(k). Spousal Rights ERISA (Employee Retirement Income Security Act) provides the member’s spouse with certain rights in the member’s 401(k) assets. These rights can not be given up without the spouse’s written consent. Most plans require all distributions to be paid in annuity form, with survivor annuity benefits payable to the surviving spouse, unless the member waives that form of payment and his spouse consents in writing to the waiver. The waiver usually has to be notarized by a plan representative. Similarly, the member’s spouse may also have to give written consent to any loans. A court may issue a domestic relations order (QDRO) that provide for the payment of child support, alimony, or division of mutual property. A QDRO can direct all or a portion of the plan member’s 401(k) assets to be paid to the member’s spouse or former spouse, child, or other

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dependents. The member will be subject to income taxes in payments pursuant to a QDRO that are not made to the member’s spouse or former spouse. The 10 percent early withdrawal penalty does not apply to payments made under a QDRO. OTHER IMPORTANT FACTS PLAN MEMBERS, INSURANCE AGENTS AND BROKERS SHOULD KNOW ABOUT QDRO. A. IDENTIFICATION OF PARTICIPANT AND ALTERNATE PAYEE A QDRO must clearly specify the name and last known mailing address (if any) of the participant and of each alternate payee covered by the QDRO. In the event that an alternate payee is a minor or legally incompetent, the QRDO should also include the name and address of the alternate payee’s legal representative. A QDRO can have more than one alternate payee, such as a former spouse and a child. The “participant” is the individual whose benefits under the plan are being divided by the QDRO. The participant’s spouse (or former spouse, child, or other dependent) who receives some or all of the plan’s benefits with respect to the participant under the terms of the QDRO is the “alternate payee.”

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B. IDENTIFICATION OF RETIREMENT PLAN A QDRO must clearly identify each plan to which the QDRO applies. A QRDO can satisfy this requirement by stating the full name of the plan as provided in the plan document.

c. AMOUNT OF BENEFITS TO BE PAID TO ALTERNATE PAYEE A QDRO must clearly specify the amount or percentage of the participant’s benefits in the plan that is assigned to each alternate payee, or the manner in which the amount or percentage is to be determined. Many factors should be taken into account in determining which benefits to assign to an alternate payee and how these benefits are to be assigned. The following subjects highlight some of these factors. 1. Types of Benefits In order to decide how to divide benefits under a QDRO, the drafter first should determine the types of benefits the plan provides. Most benefits provided by qualified plans can be classified as (1) retirement benefits that are paid during the participant’s life and (2) survivor benefits that are paid to beneficiaries after the participant’s death. Generally, a QRDO can assign all or a portion of each of these types of benefits to an alternate payee. The drafters of a QDRO should coordinate the assignment of these types of benefits. QDRO drafters should also consider how the benefits divided under the QDRO may be affected, under the plan, by the death of either the participant or the alternate payee.

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2. Types of Qualified Plans Another important factor to consider in the drafting of a QDRO is the types of plan to which the QDRO will apply. The type of plan may affect the types of benefits available for assignment, how the parties choose to assign the benefits, and other matters. Below are two types of Plans the plan participant, insurance agents and brokers should be aware of. a. Define Benefit Plans A “defined benefit plan” promises to pay each participant a specific benefit at retirement. The basic retirement benefits are usually based on a formula that takes into account factors such as the number of years a participant has worked for the employer and the participant’s salary. The basic retirement benefits are generally expressed in the form of periodic payments for the participant’s life beginning at the plan’s normal retirement age. This stream of periodic payments is generally known as an “annuity.” There are special rules that apply if the participant is married. A plan may also provide that these retirement benefits may be paid in other forms, such as a lump sum payment. b. Define Contribution Plans A “defined contribution plan” is a retirement plan that provides for an individual account for each participant. The participant’s benefits are based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and forfeitures of accounts of other participants which may be allocated to such participant’s account.

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3. Approaches of Dividing Retirement Benefits There are two common approaches of dividing retirement benefits in a QDRO: one awards a separate interest in the retirement benefits to the alternate payee, and the other allows the alternate payee to share in the payment of the retirement benefits. In drafting a QDRO using either of these approaches, consideration should be given to factors such as whether the plan is a defined benefit plan or defined contribution plan, and the purpose of the QDRO (such as whether the QDRO is meant to provide spousal support or child support, or to divide marital property).

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Bankruptcy If the plan member files for bankruptcy, his undistributed 401(k) assets can not be reached by his creditors. The plan administrator may also be required to cease collections efforts if the member has an outstanding 401(k) loan. Bankruptcy does not, however, affect the rule that a default on a loan will cause the loan to be treated as an early distribution to the member. The member will still be subjected to income tax and the 10 percent tax penalty.

Summary Plan Description

The Summary Plan Description (SPD) is a document prepared by the employer. Federal law requires that the SPD summarize all important information of the 401(k) plan. The employer must file a more detailed plan document with the IRS. Interested parties can obtain a copy by simply contacting the IRS. The following is a list of subjects covered by the SPD:

1. Eligibility 2. Matching 3. Definition of Compensation 4. Definition of disability 5. Definition of normal retirement dates 6. Death benefits for beneficiaries 7. Vesting 8. Forfeitures 9. Termination of employment 10. Rollover from other plans

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11. Valuation of funds assets 12. Lump-sum distributions 13. Loans 14. Taxes in contributions and distributions In addition, the plan administrator must provide plan members a tax disclosure statement, outlining rollover rights and other tax information. This must be done at least 30 days and not more than 90 days before the member receives distributions.

Important IRS Publications

Plan members should call the IRS and ask for IRS Publication 590 on IRA’s and Publication 575 on Pension and Annuity Income.

IRA – Check Writing Program

If the plan member is age 591/2 or older and has a Rollover IRA, he might be allowed to write out checks for distributions. The IRA check writing program allows the individual to write checks against his IRA account to get cash, pay bills or to make purchases. Most brokers, bankers and mutual funds require a minimum initial amount to open a Rollover IRA account. There is generally no deadline for making a direct rollover.

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A plan member may roll over assets from a 401(k) to a Traditional IRA if he falls into one of the following categories: a. The individual is a participant in an employer-

sponsored plan and is either a retiree or is changing jobs.

b. The person is a surviving spouse of a deceased plan participant.

c. The plan member’s employer terminated the 401(k) plan.

d. The individual is a former spouse identified in a Qualified Domestic Relation Order (QDRO).

Generally, Rollover IRA accounts may receive a rollover of assets from one or more of the following types of qualified retirement plans. 1. Pensions (Define Benefit Plan) or profit sharing plans

(Define Contribution Plan) under the Internal Revenue Code Sec. 401(a), including IRC Sec. 401(k) plans.

2. Tax – sheltered annuities (403B plans). Distributions that are not allowed to be rolled over into a Rollover IRA fall into the following categories: 1. Assets that are not taxable 2. Assets that require a minimum distribution 3. Some types of annuity payout or payments that are

made based on life expectancy or a specific period of ten years or more.

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Rolling Over Company’s Stock If the plan participant receives a distribution of employer stock and do not elect to roll it over, he must pay taxes on the purchase price in the year distributed. The member will still be subject to the 10% early withdrawal penalty if he is under age 591/2. The individual can opt to defer paying taxes on part or all of the distribution until he sells the stock. When the company stock has been sold, he will pay taxes at the capital gains rate, which is generally lower than his income tax rate. IRA Account Protection The securities in a rollover IRA Account are fully protected by the Securities Investor Protection Corporation (SIPC). The account is protected up to $500,000 in cash and securities, but only $100,000 of cash will be protected. The remaining coverage is provided by other insurers, such as the Asset Guaranty Insurance Company. This insurance coverage does not protect the investor against losses due to market fluctuations.

Distribution Notice

Generally, payments from employer’s Qualified Retirement Plans must be delayed for a minimum of 30 days, to allow the plan member time to consider his distribution options. The member may waive the 30 day requirement, but

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employers must still wait 7 days from the date they give notice before making distributions. Participant’s Account Balance If the participant’s vested account balance is $5,000 or less, the plan administrator has the right to pay distributions to the participant in a lump sum payment. If the member’s account balance exceeds $5,000 the member must consent to the form of payment by the plan. At the end of 2002, the average 401(K) account balance was $ 49,000. This was a decrease of 2.5 percent from the year 2001. In 2002, over a quarter of the balances were below $5,000. Social Security Benefits Eligibility for Social Security Benefits is determined by the number of “credits” a taxpayer earns while working. In 1988, an individual worker received one credit for each $ 700 of earned wages and salaries. The maximum credits that can be obtained per year are four. People borne in 1929 or later need 40 credits (10 years of work) to become eligible to receive social security benefits. Fewer credits are needed for workers who were borne earlier. Extra earned credits will not increase the worker’s monthly social security check. The higher the worker’s income, the higher the benefits the worker will receive each month.

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Social Security Benefits are based on the average earnings over an individual’s lifetime. The average earnings are then multiplied by a formula spelled out by Federal Law. This calculation determines the taxpayer’s monthly benefits. The amount is also adjusted for inflation. Generally, the retiree’s monthly social security check will replace approximately 42% of the income that will be needed during retirement. When Americans are nearing retirement, many have to face the dilemma of deciding when to begin drawing Social Security benefits. Should they take benefits at age 62, but receive a smaller monthly check for life? Or should they wait until full retirement age, and receive a larger check? Basically, if a person begins taking benefits early, at full retirement age or at age 70, they will receive a similar amount over their expected lifetime. In order for this to be accurate, they would have to be average and die according to the mortality table used by the Social Security Administration. But most Americans are not average. Some will live longer than others. Many people have a history of longevity in their family, but some families are plagued with serious health problems that will cause them not to live as long.

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If the goal is to maximize Social Security benefits, life expectancy is a major factor in figuring when to take benefits. Experts believe that people, whose families have a history of longevity, should postpone receiving benefits to at least their full retirement age. Some people will be better off taking benefits early if they are in poor health and likely not to live long. Some people might have no choice but to take benefits early, if they do not have enough other income to meet living expenses. Social Security will penalize those who are planning to take their benefits early but will continue working. In 2005, for every $2.00 of earnings over $12, 000.00, Social Security will withhold $1.00 in benefits until full retirement age. Once normal retirement is reached, the agency will adjust benefits upward to reflect those benefits withheld. The Social Security Administration offers online calculators at www.ssa.gov that show the impact of taking benefits at various ages. By electing to begin benefits at age 62 rather than full retirement age, the retiree would remain financially ahead for more than a decade because he would collect more checks for more years. Age 75 and 10 months is the break-even point, at which the total received, is the same whether benefits are taken early or later.

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According to Social Security, the life expectancy for a 61-year old is 79 for a man and about 83 for a woman. Most people start drawing benefits at age 62. Not saving enough for retirement and needing the money to make ends meet are some of the reasons why people take benefits early.

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COURSE NAME: 401 K

AGENT’S NAME............................................................... SOCIAL SECURITY # ..................................................... ADDRESS............................................PHONE................... CITY....................................STATE................ZIP CODE 1..... 21.... 41... How did you pay for this 2..... 22.... 42.... course? Please check one. 3..... 23.... 43.... ___Credit Card 4..... 24.... 44.... ___Cash/Check 5..... 25.... 45.... 6..... 26.... 46.... 7..... 27.... 47.... 8..... 28.... 48.... Fax this answer sheet to: 9..... 29.... 49.... 1-410-734-7966 or 10... 30.... 50.... 1-410-298-5239 11.... 31.... 51.... 12.... 32.... 52.... 13.... 33.... 53.... 14.... 34.... 54.... 15.... 35.... 55.... 16.... 36.... 56.... 17.... 37.... You can also take the test on-line 18.... 38.... by clicking on the following 19.... 39.... test-site: 20.... 40.... http://www.colemantesting.com/

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YOU CAN ALSO TAKE THE TEST ON-LINE BY CLICKING ON THE FOLLOWING TEST-SITE: http://www.colemantesting.com/ 401(K) Plans Questions

1. The plan administrator must provide the plan member a tax disclosure statement no more than, how many days after distribution? a. 10 b. 20 c. 50 d. 90 2. What do the initials SPD stand for? a. Summary Plan Description b. Summary Plan Document c. Summary Plan Details d. none of the above

3. What will you not find in the SPD?

a. The Plan member’s security number b. loan provisions

c. Eligibility d. Information on retirement dates

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4. In regard to the 401(k) Plan which of the following is the plan sponsor? a. Employees b. Investment managers c. Employers d. Plan Administrators 5. Who is responsible for buying and selling of fund shares of a 401(k)? a. Employers b. Employees c. Sponsors d. Investment managers 6. Who is responsible for overseeing the operation of the 401(k) plan? a. Plan Sponsors b. Employers c. Employees d. Plan Trustees

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7. Who is responsible for keeping track of the plan member’s 401(k) account? a. Plan Administrators b. Plan Trustees c. Plan Record Keepers d. Employers 8. Disability as defined in a 401(k) as? a. Being unable to engage in any gainful activity for the foreseeable future. b. Being unable to work for one week c. Being unable to work for a month d. none of the above 9. In regard to severance of employment, the IRS early withdrawal penalties only apply if the plan member is under which age? a. 35 b. 45 c. 55 d. 591/2

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10. If a plan member terminates his employment, he will be able to take which of the following with him. a. Unvested company match contributions b. Unvested company profit sharing contributions c. The plan member’s 401(k) contributions d. none of the above 11. All are advantages of borrowing from a 401(k) except a. Ease of obtaining a loan b. No credit checks c. low interest rates d. expensive fees 12. The following are disadvantages of borrowing from a 401(k) except a. Prior spousal consent b. Retirement goals being upset c. Cost of replenishing the 401(k) account d. The accessibility of the 401(k) assets 13. 401(k) plans offer a selection of investment options that have been chosen by which of the following person(s)? a. Plan Trustee b. Investment managers c. Employers d. Record keepers

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14. 401(k) is offered to individuals employed by which groups. a. small business b. medium size business c. large business’ d. all of the above 15. When will an individual have to report dividends, interest, and capital gains earned in his 401(k), to the IRS? a. Every year b. At age 591/2 c. When the 401(k) assets are withdrawn d. never 16. An individual will need approximately what percentage of his pre-retirement income during retirement? a. 30% b. 50% c. 70% to 80% d. 100%

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17. How many stages are in a 401(k) cycle? a. One b. Two c. Three d. Four 18. All of the following are part of the 401(k) cycle except a. accumulation stage b. rebalancing c. withdrawal stage d. all of the above 19. A 401(k) plan is funded largely by who? a. Employers b. Employees c. beneficiaries d. Investment managers 20. Plan members are always 100% vested in the following except? a. The member’s 401(k) contributions b. The earnings on the member’s 401(k) contribution c. The employer’s matching contributions d. none of the above

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21. Sponsors of 401(k) plans must give plan members which of the following rights to avoid the dangers of being sued by the plan members? a. Control over their investments b. Information about the investments to be able to make informed investment decisions c. Choice of various investments d. All of the above 22. IRA Checking programs allow individuals which of the following privileges? a. Write checks to get cash b. Write checks to pay bills c. Write checks to make purchases d. All of the above 23. Which of the following usually accepts rollover 401(k) a. Brokers b. Bankers c. Mutual funds d. All of the above

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24. In regard to social security benefits, each $700 of earned wages will generate how many credits? a. One b. Two c. Three d. Four 25. Who determines which investment options are offered to plan participants? a. Trustees b. Sponsors c. Plan members d. Investment managers 26. Who is responsible for answering questions, pertaining to the 401(k) plan? a. Sponsors b. Plan administrators c. Investment managers d. Custodians

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27. Who is responsible for monitoring employees’ participation in the 401(k) plan? a. Plan Administrators b. Employers c. Record Keepers d. Trustees 28. Who is responsible for buying and selling stocks and bonds for the fund? a. Trustees b. Custodians c. Investment managers d. Plan members 29. When buying the company’s stock, the plan participant should consider which of the following: a. The company’s future outlook b. The company’s financial soundness c. The investor’s risk tolerance d. All of the above

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30. If the plan member files for bankruptcy, his undistributed 401(k) assets cannot be seized by which of the following? a. Creditors b. Spouse c. Dependent children d. Former spouse 31. The plan sponsor must abide by rules enforced by which governmental agency or agencies? a. Pension Benefit Guaranty Corporation b. IRS c. Department of Labor d. All of the above 32. What is the tax credit for small business’ that set-up 401 (k) plans? a. $100 per year b. $300 per year c. $500 per year d. $800 per year

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33. The new 401(k) plan must have at least how many eligible participating employees who are not classified as highly compensated employees? a. one b. two c. three d. four 34. Plan members usually have their 401(k) contributions taken out of their? a. checking accounts b. savings accounts c. paychecks d. money market accounts 35. The amount a plan member can contribute to a 401(k) is usually a percentage of the member’s? a. 401(k) balance b. assets c. earnings d. none of the above

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36. Since 1926, inflation has averaged _____ per year. a. 5% b. 3% c. 7% d. 10% 37. Retirees will need to create sufficient income streams for how many years? a. 5 yrs. b. 10 yrs. c. 20 or more years d. 15 years 38. If the plan member desires to know detailed information about the company’s 401(k) plan he should read _______. a. Newspapers b. Magazines c. Books d. Summary Plan Descriptions 39. Who is responsible for making sure that employees’ pretax contributions do not exceed legal limits? a. Employers b. Employees c. Trustees d. Investment Managers

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40. Which of the following are disadvantages of borrowing from a 401(k) plan? a. Fees b. Lost future earnings c. Paying extra taxes d. All of the above 41. What the traditional retirement age? a. 52 b. 55 c. 65 d. 70 42. How many credits does a person need to be entitle to social security benefits? a. 10 b. 20 c. 30 d. 40 43. For every $ 700.00 of earned income, a worker will receive how many social security credits. a. 1 b. 2 c. 3 d. 4

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44. Social Security Benefits are based on................... a. life time average earnings b. number of family members c. number of employers d. none of the above 45. A retiree’s monthly social security check will replace approximately ...........% of his pre-retirement income? a. 15 b. 42 c. 75 d. 80 46. Under “defined contribution plans” participant’s benefits are based solely on which of the following? a. amounts put into the participant’s account b. income earned c. gains, losses, and expenses d. all of the above 47. Under “defined benefit plans” the stream of periodic payments is known as a________. a. payroll check b. loan c. withdrawal d. annuity

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48. In regard to retirement benefits, a QDRO must specify each _____ to which the QDRO applies. a. loan b. plan c. paycheck d. withdrawal 49. Under a QDRO order, if the alternate payee is a minor or legally incompetent, the QDRO should also state the name and the address of the alternate payee’s _______. a. cousin b. brother or sister c. legal representative d. none of the above 50. 401(K) Plans are classified as _______________. a. define benefit plans b. define contribution plans c. cash balance plans d. savings accounts 51. Most retirees take their Social Security benefits at what age? a. 45 b. 60 c. 62 d. 70

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52. Experts believe that people whose families have a history of poor health and likely not to live long should____ a. take Social Security benefits at age 62 b. not take Social Security benefits c. take Social Security at age 70 d. take Social Security benefits at age 55 53. People whose families have a history of longevity should________. a. postpone Social Security benefits at age 65 or longer b. take Social Security benefits at age 55 c. take Social Security benefits at age 62 d. not take Social Security at all 54. If retiree takes Social Security benefits at age 62 and is still working, Social Security will deduct _____of benefits for every $ 2.00 earned over $ 12,000.00. a. $ 10 b. $ 5 c. $ 1 d. $ 20

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55. According to Social Security, the life expectancy for a male age 61 is ___. a. 65 b. 79 c. 75 d. 83 56. What is the life expectancy for a female age 61? a. 65 b. 70 c. 75 d. 83

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