Certified Plan Sponsor Professional (CPSP) Practice Exam

Which benefit formula is commonly seen in traditional Defined Benefit plans?

1. 3% of final salary times years of service

2. 5% of average compensation times years of service

3. 4% of cumulative contributions

4. A fixed dollar amount for each year served

The correct answer is: 5% of average compensation times years of service

The benefit formula commonly seen in traditional Defined Benefit plans often reflects a structure that combines a percentage of average compensation over a specific period with years of service. The formula that incorporates a percentage of average compensation and multiplies it by years of service is a prevalent method for calculating retirement benefits in these plans. This approach provides a clear connection between the retiree’s salary and the total benefit they will receive, rewarding employees for their length of service as well as their income level at retirement. In contrast, the other options represent different calculations that may not typically align with the traditional structures of Defined Benefit plans. For example, using a set percentage of cumulative contributions or offering a fixed dollar amount for each year served does not usually encapsulate the salary-based approach characteristic of these plans. Additionally, while the first option shares some similarities with Defined Benefit plans, it is less aligned with the typical methodology that emphasizes average compensation over a longer period, which is generally more stable and reflective of an individual’s earnings throughout their career.