Frustration with defined benefit plan questions

My question is about

You may note my frustration in this post. Please know I am very happy with Achievable.

I answered the question correctly selecting “57 y ear old with a $850,000 annual salary”. I am continually baffled by the questions/content about defined benefit plans. My context comes from years of managing most aspects of many qualified plans, including defined benefit plans and 401(k) retirement plans, except for performing actuarial services, early in my career. I also took a Pension course from Wharton. Very little from those early experiences matches what this exam prep stresses about defined benefit plans. I suspect that must be based on the actual exam content.

Does the Series 65, or the other FINRA exams for that matter, look at defined benefits plans solely on the basis of salary and proximity to retirement? If so, this is contrary to how defined benefit plans work in real life – years of service is nearly always a major variable in determining an accrued vested benefit. In fact many defined benefit plans have a slightly higher weight on service than salary! The other key variable is the plan’s definition of salary, such as final average salary (highest 5 years, or average of last 3 years, for example).

Do you know for certain that the exam I will take, Series 65, ignores the issue of years of service? If so, then I can most likely come up with the correct answer. However, in real life, more information would be needed to answer depending on the answer choices. A 57 year old employee who is a recent hire might retire at 65 with only 7 years of service. While that employee would be vested according to ERISA, the low years of service might produce an annual benefit of about 10.5% to 15.5% of salary whereas a 30 to 35 years of service retiree might have an annual benefit of 45% to 74% of salary. I used percentage ranges to reflect variations in quick and dirty formulas (1.5% to 2.2% of salary per year), for example).

I guess I am stumped and disappointed that FINRA would take an incorrect view of a qualified retirement plan. Yet, they are much more accurate with 401(k) plans. Any idea why this this? Does it some how make sense that I am not seeing?

It is true defined benefit plans are less common though they still exist for about 15% of private sector employees and about 86% of public employees.

Sorry this is long-winded.


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Hi @Emilio_Rogahn - thank you for the thoughtful inquiry.

Securities licensing exams like the Series 65 tend to stay very “surface level” with most test concepts. Concepts like fundamental analysis, bond duration, exchange traded funds, futures contracts, alternative minimum tax, and virtually all rules & regulations are good examples. In the real world, these concepts are significantly more complex than what is needed to be known for the exam.

Defined benefit plans are no different. Your experience is 100% valid, and you probably know more about the intricacies of defined benefit plans than me. However, it is our job at Achievable to “distill” the material down far enough to a) ensure our materials aren’t excessively long and b) reflect the reality of the actual exam. We could certainly write more material on defined benefit plans, but it wouldn’t likely help improve test outcomes. Additionally, defined benefit plans are already lightly tested on the exam (I’d expect anywhere from 0-2 questions on this concept).

It seems the main contention in your post is years of service. We believe the exam approaches defined benefit plans assuming the employee has obtained the full annual benefit (which is why we discuss the typical 20-year qualification period utilized by many organizations for full pension benefits). Assuming the employees in a test question have qualified or eventually will qualify, we can now focus on age and salary. Most pension plans pay a percentage of salary in retirement, so organizations are forced to set aside the most funds for those with high salaries that are closest to gaining those benefits.

One last thing to keep in mind - questions like the one you referenced only provide age and salary. There’s no way to determine the years of service for any of the answer choices. While the 57 year old may be the oldest, we have no idea how long they’ve worked for the organization. We can’t make any assumptions, so we shouldn’t consider years of service when determining the correct answer.

I hope this helps! Please let me know if you have any other questions.

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