Certified Plan Sponsor Professional (CPSP) Practice Exam

What retirement plan design is commonly considered to align well with employer goals and employee expectations?

1. Defined benefit plan

2. Defined contribution plan with 401(k) feature

3. Cash balance plan

4. Traditional IRA

The correct answer is: Defined contribution plan with 401(k) feature

A defined contribution plan with a 401(k) feature is widely recognized for its alignment with both employer goals and employee expectations. This type of plan allows employees to save for retirement through payroll deductions, which are often matched by employer contributions, hence encouraging higher participation and savings. From an employer's perspective, a defined contribution plan typically involves lower long-term financial commitment compared to a defined benefit plan, which requires employers to ensure a specific payout at retirement regardless of investment performance. The defined contribution model shifts some of the investment risk to employees and offers flexibility regarding contributions and withdrawals, which can be appealing to both current and prospective staff. Additionally, employees value the ability to have control over their investment choices and the potential for higher returns, depending on market performance. The portability of funds, allowing employees to transfer their investments when changing jobs, also meets modern workforce dynamics where job mobility is common. While other options have their advantages, such as a cash balance plan's hybrid structure that provides more predictable benefits, they may not offer the same level of active participation and investment choice that employees often expect today. Traditional IRAs, while beneficial for individual savings, do not provide the employer’s matching contributions or the organized structure that a 401(k) plan offers.