Certified Plan Sponsor Professional (CPSP) Practice Exam

Which factors can impact the funding of a Defined Benefit Plan?

1. Only the age of participants

2. The age, compensation of participants, and the plan's investment performance

3. Employees' years of service only

4. The performance of the company stock exclusively

The correct answer is: The age, compensation of participants, and the plan's investment performance

The funding of a Defined Benefit Plan can be significantly influenced by several key factors, making option B the most accurate choice. The age of participants plays a crucial role because older employees, who are closer to retirement, typically accrue benefits at a faster rate compared to younger employees. As a result, the plan's liabilities increase as the workforce ages, requiring more funding to ensure that the plan can meet its obligations. Additionally, the compensation of participants is vital, as the benefits received from a Defined Benefit Plan are usually calculated based on a percentage of the employee's salary, often at the time of retirement. Therefore, as participants' salaries increase, the necessary funding for the plan also escalates to cover those increased benefits. Lastly, the plan's investment performance directly affects funding levels. If the investments within the plan perform well, they can generate returns that help meet the plan's liabilities, reducing the need for additional funding from the employer. Conversely, poor investment performance can increase the required contributions to maintain the plan's solvency. This holistic view underscores why option B, which includes the age, compensation of participants, and the plan's investment performance, is the correct choice for understanding the factors that impact Defined Benefit Plan funding.