Explain how investment decisions on the pension fund would change if the defined-benefit plan was changed to a defined-contribution plan.

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Explain how investment decisions on the pension fund would change if the defined-benefit plan was changed to a defined-contribution plan.

How Pension Funds Facilitate the Flow of Funds

Carson Company has a defined-benefit pension plan that provides generous benefits to its employees upon retirement.

a. Explain the role of the portfolio managers who manage the pension fund. What is their primary role?

How Pension Funds Facilitate the Flow of Funds

Carson Company has a defined-benefit pension plan that provides generous benefits to its employees upon retirement.

b. Explain the trade-off between investing in bonds versus in stock for the purpose of providing future retirement benefits.

How Pension Funds Facilitate the Flow of Funds

Carson Company has a defined-benefit pension plan that provides generous benefits to its employees upon retirement.

c. Explain how investment decisions on the pension fund would change if the defined-benefit plan was changed to a defined-contribution plan.

Answer & Explanation (3)

part a

Verified Answer
Portfolio managers are responsible for managing the pension funds on the behalf of the participants or the employees. Their main role is to make decisions pertaining to the investment of funds into various market securities. They act as an agent to the employees and take decisions in their best interests.

part b
Verified Answer
The trade-off here is that of risk and return. Bonds are comparatively safer than stock but the return earned on bonds is fairly less. Also, bonds lock the investments for a defined period of time. Stocks are easier to buy and sell and have higher liquidity vis-a-vis bonds.

part c
Explanation
A defined benefit plan is a plan where the companies take responsibility for the investment and the amount of benefit is not according to the choice of the employees. In a contribution plan, the employee invests in the funds as well as the employer, and the contributions are known. The employee is eligible to choose the portfolio according to the desired return.

Verified Answer
The amount of contributions can be according to the choice of the employee.
The employee is free to choose the portfolio and would invest in securities that earn him higher value.
The funds are supported by both the employer and the employee.

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