Chartered Financial Consultant (ChFC) Retirement Planning and Employee Benefits Syllabus

Retirement Planning and Employee Benefits syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Retirement Planning and Employee Benefits in Chartered Financial Consultant (ChFC), not a summary of it.

1. 1

   Retirement Needs Analysis

   4 topics

   • Estimating Retirement Income Needs
     • Replacement ratio and budgeting methods
     • Inflation and longevity assumptions
   • Sources of Retirement Income
   • Capital Needs and Savings Gap Analysis
   • Sequence-of-Returns and Longevity Risk
2. 2

   Qualified Retirement Plans

   4 topics

   • Defined Benefit Plans
     • Traditional and cash balance plans
   • Defined Contribution Plans
     • 401(k), profit-sharing, and money purchase plans
     • ESOPs and stock bonus plans
   • Plan Qualification and Nondiscrimination Rules
     • Coverage, vesting, and contribution limits
     • ADP/ACP and top-heavy testing
   • ERISA Fiduciary and Reporting Requirements
3. 3

   IRAs and Other Retirement Arrangements

   4 topics

   • Traditional and Roth IRAs
     • Contribution and deductibility rules
     • Roth conversions
   • SEP and SIMPLE Plans
   • 403(b) and 457 Plans
   • Nonqualified Deferred Compensation
4. 4

   Retirement Distributions and Social Security

   4 topics

   • Distribution Rules and Penalties
     • Required minimum distributions (RMDs)
     • Early distribution penalties and exceptions
   • Social Security Benefits
     • Eligibility and benefit calculation
     • Claiming strategies and full retirement age
     • Taxation of Social Security benefits
   • Retirement Income Withdrawal Strategies
     • Safe withdrawal rates and bucketing
   • Annuities in Retirement
5. 5

   Employee Benefits Planning

   4 topics

   • Group Life and Disability Benefits
   • Group Health and Cafeteria Plans
     • Section 125 plans and flexible spending accounts
   • Equity-Based Compensation
     • Incentive stock options (ISOs)
     • Nonqualified stock options and RSUs
   • Fringe Benefits and Their Taxation

Retirement Planning and Employee Benefits flashcards for Chartered Financial Consultant (ChFC)

24 of 51 cards from the Retirement Planning and Employee Benefits deck — real questions with worked answers.

1. What is the income replacement ratio method for estimating retirement income needs, and what range is commonly assumed?

   It estimates needed retirement income as a percentage of pre-retirement gross income, typically 70%–85%, reflecting reduced expenses (no payroll taxes, retirement saving, work costs) once retired.

2. In capital needs analysis, what is the difference between the 'capital depletion' (annuity) approach and the 'capital preservation' approach?

   Capital depletion (annuity method) spends down both principal and earnings so the fund reaches $0 at the end of the time horizon, requiring a smaller nest egg. Capital preservation keeps the principal intact (living on earnings only), leaving the estate whole and requiring a larger fund.

3. Write the present value formula for the lump sum needed at retirement to fund a level annual income for n years, ignoring inflation.

   $$PV = PMT \times \frac{1 - (1+r)^{-n}}{r}$$ where $PMT$ is the annual withdrawal, $r$ is the assumed real return, and $n$ is the number of years.

4. In retirement planning, why is the real (inflation-adjusted) rate of return used rather than the nominal rate?

   Because retirement income must keep pace with rising prices. Using the real return, $r_{real} \approx \frac{1+r_{nom}}{1+i} - 1$, lets the withdrawal grow with inflation while the calculation treats payments as level in today's dollars.

5. What is the 'savings gap' in retirement planning?

   The shortfall between the capital a client is projected to accumulate by retirement and the capital actually needed to fund the retirement income goal; the plan must close it via additional savings, higher returns, later retirement, or reduced spending.

6. Define sequence-of-returns risk.

   The risk that the order of investment returns—especially poor returns early in retirement combined with withdrawals—permanently depletes a portfolio, even if the average return is adequate. Early losses are far more damaging than late losses when money is being withdrawn.

7. What is longevity risk in retirement planning?

   The risk that a retiree outlives their assets by living longer than expected. It is mitigated with lifetime-income vehicles such as annuities, Social Security maximization, and conservative withdrawal rates.

8. Name the three legs of the traditional 'three-legged stool' of retirement income.

   Social Security, employer-sponsored retirement plans (pensions/defined contribution), and personal savings/investments.

9. How does a defined benefit (DB) plan determine a participant's benefit, and who bears the investment risk?

   A DB plan promises a specified retirement benefit, typically via a formula based on years of service and final-average pay (e.g., $1.5\% \times \text{years} \times \text{final avg salary}$). The employer bears the investment and funding risk.

10. In a defined contribution (DC) plan, what is defined and who bears the investment risk?

    Only the contributions (inputs) are defined; the final benefit depends on contributions plus investment performance. The employee bears the investment risk.

11. What is the 2024 elective deferral limit for a 401(k), and the age-50 catch-up amount?

    The 2024 employee elective deferral limit is $23{,}000, with an additional age-50 catch-up of $7{,}500 (total $30{,}500).

12. What is the 2024 IRC §415(c) overall annual additions limit for a defined contribution plan?

    The lesser of 100% of compensation or $69{,}000 (excluding age-50 catch-up contributions).

13. What is a cash balance plan and how is it classified?

    A cash balance plan is a defined benefit plan that looks like a DC plan: each participant has a hypothetical account credited with annual pay credits and guaranteed interest credits. The employer bears investment risk, so it is legally a DB (hybrid) plan.

14. What is the purpose of plan qualification under the Internal Revenue Code?

    A 'qualified' plan meets IRC §401(a) requirements to receive tax advantages: employer deductions for contributions, tax-deferred growth, and no current taxation to employees until distribution.

15. What do the ADP and ACP nondiscrimination tests measure in a 401(k) plan?

    The Actual Deferral Percentage (ADP) test compares the average elective deferrals of highly compensated employees (HCEs) to non-HCEs; the Actual Contribution Percentage (ACP) test does the same for matching and after-tax contributions. They prevent plans from favoring HCEs.

16. For 2024, what compensation level defines a Highly Compensated Employee (HCE)?

    An employee earning more than $155{,}000 in the prior year (2023 lookback), or any 5%+ owner regardless of compensation.

17. What is a 'safe harbor' 401(k) and what does it exempt the plan from?

    A plan that makes mandatory, fully vested employer contributions (e.g., a 3% nonelective or a basic match) in exchange for an automatic exemption from the ADP/ACP and top-heavy nondiscrimination tests.

18. List the five basic fiduciary duties imposed by ERISA on plan fiduciaries.

    Duty of loyalty (act solely in participants' interest), duty of prudence (the 'prudent expert' standard), duty to diversify investments, duty to follow the plan documents, and duty to pay only reasonable plan expenses.

19. What ERISA reporting forms must a qualified plan generally file, and with whom?

    Form 5500 (annual return/report) is filed with the DOL/IRS, and a Summary Plan Description (SPD) plus Summary Annual Report (SAR) must be furnished to participants.

20. Compare the tax treatment of a Traditional IRA versus a Roth IRA at contribution and distribution.

    Traditional IRA: contributions may be deductible (pre-tax), growth is tax-deferred, and qualified distributions are fully taxable. Roth IRA: contributions are after-tax (nondeductible), growth is tax-free, and qualified distributions are tax-free.

21. What is the 2024 IRA contribution limit and the age-50 catch-up amount?

    $7{,}000 for 2024, plus a $1{,}000 catch-up for those age 50 and older (total $8{,}000).

22. What two conditions make a Roth IRA distribution 'qualified' (tax- and penalty-free)?

    The account must satisfy the 5-year holding period AND the distribution must be made after age $59\tfrac{1}{2}$, due to death, disability, or for a first-time home purchase (up to $10{,}000).

23. How does a SEP IRA work and what is the employer contribution limit for 2024?

    A Simplified Employee Pension lets an employer contribute to employees' IRAs. The 2024 limit is the lesser of 25% of compensation or $69{,}000. Only the employer contributes, and contributions must be uniform as a percentage of pay.

24. What are the employee deferral limit and required employer contribution options for a SIMPLE IRA in 2024?

    Employee deferral limit is $16{,}000 (plus $3{,}500 catch-up at age 50). The employer must either match dollar-for-dollar up to 3% of pay or make a 2% nonelective contribution for all eligible employees.

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