SIE Exam Question 725: Answer and Explanation

Question: 725

Phil has owned his company, Beta Corporation, for 15 years. He is now 52 years old and plans to retire at age 64. He has five young employees and wants to establish a retirement plan that will provide him with the highest benefit. Assuming adequate cash flow, which of the following is the most suitable plan for Beta Corporation to establish?

• A. Age-based profit sharing plan
• B. Defined benefit plan
• C. Money purchase plan
• D. SIMPLE IRA

Correct Answer: B

Explanation:

The defined benefit plan would provide the greatest benefit to Phil because he has five younger employees, and defined benefit plans favor older owner/employees. Of the other options listed, the age-based profit sharing plan is a valid consideration. However, the question says to assume adequate cash flow in the business. Profit sharing plans would benefit from unstable cash flow because contributions must only be substantial and recurring. The best answer is the defined benefit plan.