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What is a key characteristic of a money purchase plan?
It allows for a variable benefit payout
It must offer benefits in the form of an annuity payment
It is designed solely for highly compensated employees
It has no contribution limits
The correct answer is: It must offer benefits in the form of an annuity payment
A money purchase plan is characterized by its requirement to offer retirement benefits in the form of an annuity payment. This stipulation is essential because money purchase plans are a type of defined contribution plan where employers are obligated to make fixed contributions to participants’ accounts annually, and the ultimate benefits that employees receive depend primarily on their account balance at the time of retirement. The requirement for benefits to come as an annuity ensures that employees will have a reliable stream of income during retirement rather than a lump sum which may be exhausted quickly or mismanaged. This feature is designed to promote financial security in retirement, making it a distinguishing element of money purchase plans compared to other retirement savings vehicles. In terms of the context of the other options, many defined contribution plans, including 401(k) plans, may allow for a variety of payout options, including lump sums or installment payments, but a money purchase plan's focus on annuitized payments sets it apart. The characterization of money purchase plans as only for highly compensated employees is inaccurate since they can be offered to a broader employee base, and contribution limits do exist in these plans, contrary to the assertion that there are none.