🏢 Corporate Plans (Defined Benefit & Defined Contribution) – Series 7 Exam

Understanding corporate retirement plans is essential for passing the Series 7 exam, especially as part of the broader topic of retirement and tax-advantaged investment vehicles. The exam tests your knowledge of both defined benefit plans and defined contribution plans, including their structure, funding, suitability, and regulatory characteristics.

Here’s what you need to know.

🧾 Defined Benefit Plans (DB)

📘 What Are They?

• Employer-sponsored retirement plans that guarantee a specific benefit at retirement
• Benefit is calculated based on factors like salary, years of service, and age

✅ Key Characteristics:

• Employer-funded (employee may or may not contribute)
• Employer bears investment risk
• Subject to actuarial calculations and annual funding requirements
• Covered under ERISA and PBGC-insured

⚠️ Key Risks & Limitations:

• Expensive for employer to maintain
• Less portable for employees who change jobs
• Rare in modern companies (mostly used in government or union plans)

🧠 Exam Tip:

Focus on the employer’s obligation to fund the plan and their assumption of investment risk.

📊 Defined Contribution Plans (DC)

📘 What Are They?

• Retirement plans where employees and/or employers contribute a fixed amount, but the final benefit depends on investment performance.

✅ Common Types:

• 401(k) – salary deferral, often with employer match
• 403(b) – for nonprofit or educational institutions
• Profit-sharing plans
• Money purchase pension plans
• Employee stock ownership plans (ESOPs)

✅ Key Characteristics:

• Employee bears investment risk
• Benefits are not guaranteed
• Fully portable between jobs
• Subject to annual contribution limits (adjusted annually by IRS)
• Distributions taxed as ordinary income at withdrawal

📌 2025 Limits (estimated):

• Employee elective deferral: $23,000
• Catch-up (age 50+): $7,500

🧠 Key Differences: DB vs DC

📋 Suitability Considerations on the Exam

• Younger employees: Often prefer DC plans for growth and portability
• Older employees or executives: May benefit from DB plans offering predictable income
• Small business owners: May use SEP IRAs or Solo 401(k)s for flexibility
• High-income earners: May use nonqualified deferred compensation plans

⚖️ Regulatory Highlights

• Both DB and DC plans are governed by ERISA
• Early withdrawal penalty before age 59½: 10% + ordinary income tax
• Required Minimum Distributions (RMDs) begin at age 73 (starting 2023)

🧠 Series 7 Test Tips

• Know which party bears the investment risk in each plan
• Be ready for questions on eligibility, contributions, and tax treatment
• Understand rollover rules and distribution requirements
• Be able to recommend the right plan type based on investor profile

🎯 Master retirement plans, ERISA rules, and suitability questions with scenario-based practice exams and guided review at
👉 finra-exam-mastery.com