RISK MANAGEMENT AND INSURANCE (RMIN 4000) EXAM 3 LECTURE NOTES (Summarized) UNIVERSITY OF GEORGIA.
RMIN 4000 Lecture Notes
Exam 3
Example – important
Employee retirement plans, health insurance, auto insurance
Employee benefits: Retirement Plans, ch 17
• 60% or so of 65+ people have a retirement benefit that they earned from their employer
• A company does not have to cover ALL of their employees, but there are rules about who HAS to
be covered
• 2 major categories
o Defined Benefits (DB) plans (usually just the employer contributing $)
▪ Traditional Defined Benefit—fixed monthly retirement income for as long as
retired employee lives
• no cost-of-living adjustment, very unusual in all private benefit plans
▪ Cash Balance Plan—retirement income not fixed (not guaranteed)
• Began in mid-1980’s
• “Usually not as good”
• employer puts some % of yoursalary into the market, and promises a
certain rate of return on that $ until you get to the NRA
o Ex. every year we put in 5% of your salary, and every year we
will guarantee a rate of 6% return on that account up until you
reach NRA—guaranteed a total lump sum amount you will have
at the end, and that’s all you get
• You have a choice to transfer to IRA or buy annuity plan or move $ to
your new employer’sretirement plan—consider the taxesto pay or not
pay when withdrawing
▪ Employee does not get to chose how this money is invested
o Defined Contribution (DC) plans (usually you and employer puts in same amount of $)
▪ Money Purchase—employer must make fixed contributions annually
▪ Profit Sharing—employer is not required to make fixed contributions every year
• 401(k), 403(b), 457(b) (profitsharing) plans—employee contributes,
employer sometimes contributes
▪ Keogh Plans—for self-employed people
▪ Others—SIMPLE plans and simplified employee pension plans
▪ Employee gets to chose how this money is invested based on options that the
employer gives you
• Defined Benefit Plans—Traditional
o Fixed monthly retirement benefit starting at plan’s normal retirement age
▪ Normal maximum retirement age for private plans is 65 (can be earlier)
o Employer bearsinvestment risk and longevity risk—guaranteeing $ no matter how long
you live or what happens in the market means you’re assuming the risk
o Retirement income typically based on years ofservice, % credit and “final average
salary”
▪ ONLY considers time/salary at THAT company
▪ “final average salary” will be defined in the retirement plan paper work, it is
typically your highest 3-5 year’s average (maximum of 5 years, 3 yearsis most
common)