Accredited Wealth Management Advisor Practice Exam

Which of the following is a characteristic of an age-weighted profit sharing plan?

1. It allocates contributions equally regardless of age.

2. It benefits younger employees more than older employees.

3. It allocates larger employer contributions to older employees.

4. It is not based on employee compensation.

The correct answer is: It allocates larger employer contributions to older employees.

An age-weighted profit sharing plan is designed to provide larger contributions to older employees compared to their younger counterparts. This characteristic stems from the plan's structure, which takes into account the age of employees in relation to how contributions are allocated. The reasoning behind this approach is that older employees typically have fewer working years remaining until retirement, so the plan aims to boost their retirement savings in a way that is proportional to their shorter time horizon for accumulating benefits. This characteristic aligns with the objectives of many employers who want to ensure that their older employees are adequately prepared for retirement, recognizing that they may not have the same length of time to benefit from compounding investment returns as younger employees. Therefore, the plan addresses this disparity by providing higher allocations to older employees to balance the benefits over a shorter period. The other options do not align with the underlying principles of an age-weighted profit sharing plan, as they either suggest equal treatment across ages or favor younger employees, which contradicts the primary function of such plans.