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

Jump to Answer Section
Category:

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
In defined-contribution plans, the contributions are determined by the employees themselves. These contributions can be made both by the employer and the employees. Since defined-contribution plans are more or less managed by the employees themselves, there is no scope for pension managers or politicians to step in and use pension plans as their agenda for buying votes. That is the reason why employees prefer managing their pension plans themselves.

Sample Response
No

Purchase answer to view it. $5

Login/register for free and load your wallet instantly with $5 to buy this solution.

Category: