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Successful Pension Design for Small- to Medium-Sized Businesses, 2d ed.

Successful Pension Design For Small- to Medium-Sized Businesses

This book is designed for the person who is going to design a pension for a small- to medium-sized business, i.e., the pension practitioner. Pension planning is an extremely complex area, and this book takes the reader through these complexities very well. It explains how to use the material to accomplish specific goals and what the alternatives are. It is directed towards the smaller sized business because the motivations for implementing a qualified plan are different than in a large organization.

The book is not a college textbook, but could be used as such if the instructor wants a "hands-on," get into the mechanics, practical type of course. Most students may not be interested in the amount of detail in the book unless the student is going to design or sell a pension plan. However, use of this book as a text or supplemental text would be warranted because it would equip each student, as an eventual employee or business owner, with sufficient information to thoroughly understand the mechanics and potential political issues of qualified pension plans. The student, as an eventual employee or employer, learns to optimize this most important benefit.

The beginning of the book provides an orientation by explaining how to identify the business owner's objectives, and how qualified plans can meet those objectives. Traditional problems (objections?) of pensions are addressed. A description of the pension "team" is provided, including the materials and resources required to design, develop, qualify, administer, and monitor a pension plan.

Specific types of qualified pensions are covered, including the many variations of profit sharing, money purchase, flat benefit, unit benefit, target benefit, 401(k) and stock option plans. One of the most helpful and well done items is the chart on page 263 which takes the business owner's objectives and translates them into the most appropriate plan(s). For practitioners, this is worth the price of the book alone.

The book discusses the many topics included for consideration in the design of any pension plan: typical census data, such as the age of the participants, age of key employees, past years' of service, amount of expected turnover, and the amount of flexibility desired, the importance of simplicity, how quickly the plan may be terminated, and the likelihood of a second plan. Actuarial cost methodology is provided where necessary within the text. Appendix A serves as an in depth explanation of six actuarial cost methods used with small pension plans. More examples could have been provided for the various cost methods.

Discrimination in plans has become a most difficult problem for business owners. Various approaches to handling this problem are provided. In addition, the concept of integration is explored and how proper integration can benefit the business owner and solve the problem of discrimination. Additional complex issues such as qualification of the plan with the IRS, administration, selection of fiduciaries, and the selection and monitoring of investments are presented in an intelligible manner.

Several helpful "features" facilitate an understanding of the material: planning tips, checklists, examples, and formulas. The planning tips usually provide special insight in handling problems that involve communicating with the owner or employees. The checklists summarize important points covered, providing somewhat of a "cookbook" approach to pension planning. This will be appealing to most readers considering the complexity of this subject. The many examples illustrate how benefits and costs are computed for various situations and types of plans. The various formulas provide for the calculation of: a) "annual pension expense," b) amount of contribution rate to maximize a funding objective, c) amount of contribution to avoid discrimination, d) defined contribution limits, and e) integration levels.

Appendix B provides sample plan documents and a plan design checklist. This last item provides insight as to the mass of information required to design a pension plan appropriate to the given situation.

The book is current through the end of 1986 as to tax law changes; practitioners will have to be aware of the new transition rules and safe harbors. The book provides an excellent explanation of funding a pension plan; there is little material on how to get the funds out. With the new transitional rules, that subject would require another volume of equal or greater size.

The book fills a void by speaking to the needs of the small and medium size companies, and at the same time, provides a very practical book with sufficient doctrine to appease the more theoretical-minded. The pension practitioner will find it of most benefit; everyone should enjoy its practicality and the "inside look" at the design and mechanics of small company pensions.
COPYRIGHT 1989 American Risk and Insurance Association, Inc.
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Spear, Thomas W.
Publication:Journal of Risk and Insurance
Article Type:Book Review
Date:Jun 1, 1989
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