Certified Plan Sponsor Professional (CPSP) Practice Exam

Which statement describes a key characteristic of a money purchase plan?

1. They are primarily funded by employee contributions.

2. They must offer benefits in the form of an annuity payment.

3. They guarantee a fixed payout upon retirement.

4. They allow for flexible distributions.

The correct answer is: They must offer benefits in the form of an annuity payment.

A money purchase plan is a type of defined contribution retirement plan that requires the employer to make annual contributions on behalf of employees, usually based on a percentage of their salary. One of the defining characteristics of these plans is that upon retirement, the benefits received must be offered in the form of an annuity payment. This requirement ensures that participants receive a stable stream of income throughout retirement rather than a lump sum, thus promoting long-term financial security. The requirement to offer benefits as an annuity aligns with the goals of retirement planning, as annuities can help mitigate risks associated with outliving one's savings. The structured payout mechanism through annuities offers retirees some level of predictability and financial stability over their lifetime. In contrast, other options do not accurately reflect the key characteristics of a money purchase plan. While employee contributions may play a role, the essential funding mechanism centers around employer contributions. The statement about guaranteed fixed payouts does not apply, as the payout can vary based on investment performance. Finally, money purchase plans do not allow for flexible distributions; typically, there are defined rules regarding how and when distributions can be taken. Therefore, the requirement to provide benefits through an annuity payment is a definitive characteristic that distinguishes money purchase plans in the realm of retirement