Chartered Life Underwriter (CLU) 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 Life Underwriter (CLU), not a summary of it.

1. 1

   Retirement Needs and Accumulation Planning

   3 topics

   • Retirement Income Needs Analysis
     • Wage replacement ratio
     • Inflation and longevity risk
   • Sources of Retirement Income
     • Social Security, employer plans, and personal savings
   • Capital Needs and Withdrawal Strategies
     • Sustainable withdrawal rates
     • Sequence-of-returns risk
2. 2

   Qualified Retirement Plans

   4 topics

   • Defined Benefit Plans
     • Benefit formulas and funding
     • Cash balance plans
   • Defined Contribution Plans
     • 401(k) and profit-sharing plans
     • Money purchase and ESOPs
   • Plan Qualification Requirements
     • Coverage and nondiscrimination testing
     • Vesting schedules
   • Contribution and Benefit Limits
3. 3

   IRAs and Other Retirement Vehicles

   4 topics

   • Traditional and Roth IRAs
     • Deductibility and income phaseouts
     • Roth conversions
   • SEP and SIMPLE Plans
   • 403(b) and 457 Plans
     • Governmental versus tax-exempt 457 plans
   • Distributions and Required Minimum Distributions
     • RMD timing and calculations
     • Early distribution penalties and exceptions
     • Inherited account rules
4. 4

   Group Benefits and Annuities

   3 topics

   • Group Life and Health Benefits
     • Section 79 group term life taxation
     • Cafeteria plans and flexible spending
   • Annuity Fundamentals
     • Fixed, variable, and indexed annuities
     • Accumulation and annuitization phases
   • Annuity Taxation and Payout Options
     • Exclusion ratio
     • Qualified longevity annuity contracts

Retirement Planning and Employee Benefits flashcards for Chartered Life Underwriter (CLU)

24 of 50 cards from the Retirement Planning and Employee Benefits deck — real questions with worked answers.

1. In retirement income needs analysis, what is the "replacement ratio" and what range is commonly used as a planning benchmark?

   The replacement ratio is the percentage of pre-retirement gross income needed annually in retirement to maintain one's standard of living. A common planning benchmark is roughly 70%–85%, because some expenses (payroll taxes, retirement saving, work costs) end at retirement.

2. What four primary risks must a retirement income needs analysis address?

   Longevity risk (outliving assets), inflation risk (loss of purchasing power), investment/market risk (including sequence-of-returns risk), and health care/long-term care cost risk.

3. What is "sequence-of-returns risk" in retirement distribution planning?

   The risk that poor investment returns occurring early in the withdrawal period, combined with ongoing withdrawals, permanently deplete a portfolio even if average long-term returns are adequate. Timing of returns matters once distributions begin.

4. Name the traditional "three-legged stool" of retirement income.

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

5. At what age does an individual reach full retirement age (FRA) for Social Security if born in 1960 or later, and what is the effect of claiming early at 62?

   FRA is 67 for those born in 1960 or later. Claiming at 62 permanently reduces the benefit (about a 30% reduction at FRA of 67).

6. How are Social Security retirement benefits increased by delaying claiming past full retirement age?

   Delayed retirement credits accrue at 8% per year (2/3 of 1% per month) for each year benefits are postponed past FRA, up to age 70, after which no further credits accrue.

7. What is the "4% rule" as a retirement withdrawal strategy?

   A guideline stating a retiree can withdraw 4% of the initial portfolio value in year one, then adjust that dollar amount for inflation each year, with a high probability the portfolio lasts about 30 years.

8. Give the basic capital-needs (capital preservation vs. capital depletion) distinction in retirement funding.

   Capital preservation funds retirement income solely from earnings, leaving principal intact; capital depletion (annuitization/liquidation) draws down both principal and earnings over the expected period, requiring a smaller starting nest egg.

9. What is a "systematic withdrawal" strategy and its key drawback compared to annuitization?

   Systematic withdrawal takes periodic payments from an invested portfolio; the retiree keeps control and liquidity but bears longevity and market risk, with no guarantee the money lasts for life.

10. Define a defined benefit (DB) pension plan and who bears the investment risk.

    A DB plan promises a specified retirement benefit determined by a formula (typically based on years of service and compensation). The employer bears the investment and funding risk and must make actuarially determined contributions.

11. Give a typical defined benefit plan benefit formula and identify its components.

    A common unit-benefit formula: Benefit = (benefit %) × (years of service) × (final or final-average compensation). For example, 1.5% × 30 years × average salary.

12. Which federal agency insures private defined benefit pension benefits, and what is its funding source?

    The Pension Benefit Guaranty Corporation (PBGC), funded by premiums paid by covered DB plan sponsors (not general tax revenue), guarantees basic benefits up to legal limits if a plan terminates underfunded.

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 pay credits and guaranteed interest credits. The employer bears investment risk, so it is legally a DB plan.

14. Define a defined contribution (DC) plan and who bears the investment risk.

    A DC plan defines the contribution (e.g., a percentage of pay), not the ultimate benefit. The participant's benefit equals the account balance, and the employee/participant bears the investment risk.

15. What distinguishes a 401(k) plan from a profit-sharing or money purchase plan?

    A 401(k) is a cash-or-deferred arrangement allowing employee elective salary deferrals (often with employer match); a profit-sharing plan uses discretionary employer contributions; a money purchase plan requires a fixed, mandatory employer contribution percentage.

16. What are the 2024 elective deferral limit and catch-up contribution for 401(k)/403(b) plans?

    The 2024 elective deferral limit is $23,000, plus a $7,500 catch-up contribution for participants age 50 or older (total $30,500).

17. What is the IRC Section 415(c) annual additions limit for defined contribution plans in 2024?

    The lesser of 100% of compensation or $69,000 (excluding age-50 catch-up). Annual additions include employee deferrals, employer contributions, and forfeitures.

18. What are the two main vesting schedule options for employer contributions under ERISA?

    3-year cliff vesting (0% until 3 years of service, then 100%) or 2-to-6-year graded vesting (20% after 2 years, increasing 20% per year to 100% after 6 years). Employee deferrals are always 100% immediately vested.

19. List the core qualification requirements a plan must meet under the Internal Revenue Code to be "qualified."

    It must be in writing and permanent, for the exclusive benefit of employees/beneficiaries, satisfy minimum coverage and nondiscrimination rules, meet eligibility/participation and vesting standards, observe contribution/benefit limits, and follow distribution rules.

20. What is the tax advantage "trifecta" of a qualified retirement plan?

    Employer contributions are currently tax-deductible to the employer, contributions and earnings are not currently taxable to the employee (tax-deferred growth), and investment earnings accumulate tax-deferred until distribution.

21. Define a "highly compensated employee" (HCE) for nondiscrimination testing.

    An employee who is a more-than-5% owner (in the current or prior year) OR who earned compensation above the indexed threshold in the prior year ($155,000 for 2024, used in 2024 testing this is the prior-year amount).

22. What are the ADP and ACP tests, and which plans must satisfy them?

    The Actual Deferral Percentage (ADP) test limits HCE elective deferrals relative to non-HCEs; the Actual Contribution Percentage (ACP) test does the same for employer matching/after-tax contributions. Traditional 401(k) plans must pass them (safe-harbor 401(k)s are exempt).

23. What is the maximum compensation that can be counted for plan contribution/benefit purposes in 2024 (the 401(a)(17) limit)?

    $345,000 of compensation in 2024.

24. Compare the basic tax treatment of a traditional IRA versus a Roth IRA.

    Traditional IRA: contributions may be tax-deductible, growth is tax-deferred, and qualified distributions are taxed as ordinary income. Roth IRA: contributions are after-tax (never deductible), growth is tax-free, and qualified distributions are tax-free.

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