Corporate Financial Management: PDF

Corporate Financial
Management

By considering the retirement laws and rapid increase in recognition among employees regarding
the importance of savings, numbers of retirement contributions are revolving around in
retirement funds and financial institutions. In the contemporary world, it is essential to gain a
better understanding of the retirement planning to identify retirement goals and the activities to
be performed to achieve the same in current context. It is very important for the tertiary sector
employees to interpret retirement planning, as they have a comparatively short period of
employment. Their work schedule is based on their technological knowledge, having rapid
obsolesce with the technological advancement. Organizations provide two types of a pension
plan to their employees these are Defined Benefit and Investment Choice plan, the decision is of
the employee which one they want to choose. They must make a decision according to their
needs, goals and financial targets in order to shield their future.
The present study provides highlights on the superannuation plan for the tertiary sector
employees for making investment and savings at the time of retirement. The government of
Australia has provided great support in retirement savings to motivate employees to save more;
they have obligated minimal contributions in suitable superannuation funds for the employees.
This low contribution level was established in order to reduce the stress forced by social security
system about the pension payments for providing support to employees at the stage of retirement
(Bodie, 2013).
Defined Benefit Plan and the Investment Choice Plan
A defined-benefit plan refers to retirement plan sponsored by the employee, wherein employee
gets benefit which is calculated by making use of a formula that assesses multiple factors for
example employment length and background of salary (Clark, Lusardi and Mitchell, 2015).
Portfolio management and risk associated with an investment are administered by the company
for the plan. Moreover, restrictions are also placed on the withdrawal of funds, for example,
specified methods and time of withdrawing funds. A defined benefit pension plan is an
investment plan whereby an employer assures an employee for given pension payment, in a
lump-sum amount that is computed by a formula based on the salary history of employee
(Keynes, 2016). Determination of tenure of age and services are also assessed instead of relying
on personal investment returns on a direct basis (Thakur, Jain and Soni, 2017). The defined
benefit plan is a plan in which the benefit is compensated to employees at the time of retirement

and is identified by making use a formula, which features in key determinants like the final
average salary of the employee, their age and amount of time by which they were employed.
Investment choices plan is an offer provided by most of the superannuation funds. This type of
plan enables a member of super fund to choose whether they want to invest their super fund or
not. Being a super fund member, the employee can generally decide from a range of investment
portfolios, like a balanced option, cash option, growth option or conservative option (Marglin,
2014). Those employees who can select Investment choices plan can hold personal investment
account including individual contribution as well as superannuation funds sponsored by
employees, plus a yearly allocation of gains made on their invested funds, minus any
administration as well as management charges. The territory employees can vote of the kinds of
the assets or the portfolios under the plan of investment choice towards the superannuation
assistance which is invested in and also selecting among the 4 strategies of investment. They are
a secure fund, which is cash and security of fixed interest of Australia (Merton, 2014). The
selection fund of Trustees is a balanced fund of overseas and domestic shares, infrastructure,
property assets and private equity reserves. Next is the Stable fund, which includes bond and
fixed interest securities along with a little disclosure to local and international shares and
property. Last is the Shares fund where the investment is exclusively in local and international
shares.
Both of these investments possess risk, by considering the same it is essential for the employees
to know the risks of making an investment in these funds. The nature of these investment
options, it is considered that employees are not likely to hold risk, due to less bearing on risk
employees must select defined benefit plan, and on the other hand, if the employee is likely to
hold high risk, then they can go for investment choice plan (Larimore and et al. 2009). Defined
benefit plan is less risky because this is produced and provided by the organization, while the
Investment choice plan is highly risky, as the management of the portfolio is done by employees.
Initially, it is significant to assess the ability and readiness to bear risks after decision shall be
made (Gitman, Juchau and Flanagan, 2015). If the employee does not want to associate with risk,
then the best option is defined benefit plan because all the risk is borne by the company.
However, if they make an investment in Investment choice plan, then they will have an option
regarding the asset portfolio where they want to invest.