Defined Benefit Plan: Investment Options and Factors to Consider

This article discusses the investment options available for tertiary sector employees in Australia for their superannuation contribution, specifically focusing on the investment choice plan and defined benefit plan. It explores the factors that employees should consider when deciding between the two plans, such as financial stability, age, employee mobility, historical performance, level of information available, gender, and sense of security. The article also highlights the issues of time value of money and tax deductions that can impact the investment decision. Overall, it provides insights to help employees make an informed choice for their superannuation investment.

Defined benefit plan
Module Number-
[DATE]
Hewlett-Packard
[Company address]

Table of Contents
Introduction...........................................................................................................................................1
Description of the different plans..........................................................................................................1
Investment choice plan......................................................................................................................2
Defined benefit plan..........................................................................................................................2
Factors of tertiary sector employees to decide the superannuation contribution in defined benefit plan
and other choice investment plan...........................................................................................................3
Issues of time value of money, tax deduction and other factors.............................................................5
Conclusion.............................................................................................................................................6
References.............................................................................................................................................7

Introduction
There are several various investment options used by tertiary sector employees to
create value on their investment. It is considered that due to the increasing tertiary sector of
the economy, the people are enabling to satisfy their service requirements. The difference
between the service requirement and its fulfillment is decreased to the sphere which can be
ignored. There was a problem in the tertiary economy about the demand by the consumer for
the services of high quality, which has been passed out now and now it is not a tension
anymore for the tertiary economy. To fulfill the requirements of customers, such economy
sector provides every possible service. In the current economic conditions, the development
of any economy can be measured when the focus of economy shifts to the tertiary sector from
the primary or secondary sector. The service list of the tertiary sector includes various
services and businesses such as Restaurants, transportation, salon services, schools, financial
institution, and others. The employees employed under such economic sector are called
tertiary sector employees. In addition to the basic salary, these employees get several other
benefits which can be in cash or in other kinds.
Superannuation contribution
The Superannuation contribution is one of the benefits provided to these employees.
This benefit is not paid to the employees in their service tenure but at a future date to provide
them security in the future. This is quite similar to the pension fund. For such benefit, both
employer and employee contribute a proportion of amount towards such a fund. The creation
of such a fund gives a spirit of future financial security to the employee. The creation of
funds has a variety of contribution which depends from country to country. In Australia, The
superannuation fund offers the employees two major option for contribution i.e. defined
benefit plan and other investment choices.
Description of the different plans
The tertiary employees have several options for investment to increase the overall return on
capital invested (Wall, 2015).

Investment choice plan
As the name says the investment choice plan provides the employees a chance to invest their
amount in an investment portfolio. In this type of fund, the contribution made by the
employer is fixed to a certain proportion of the salary of the employee. Such investment
option provides the interest benefit to the employee n his invested amount. Different
investment options have several portfolios comprising shares, property or both. As per
research, almost 80% Australian population opt to invest in the ‘Growth' or ‘Balanced'
investment options wherein around 80% share of investment performs in the growth of assets
i.e. share and property (Hall, Foxon, and Bolton, 2016).
Defined benefit plan
This plan is termed defined and the employer and employee have the knowledge about the
proportion attributable to the employee's fund. This is an employer's sponsored plan i.e. all
the risk and decisions under such plan shall be maintained by the employer only. The task of
investment management shall also be done by the employer. There is a certain rate of
contribution shall be defined in which proportion the employer shall make the contribution. If
there is a lower rate than the desired then it has to be met by the employer. The payment of
such fund shall be made to the employee in several forms such as in a lump sum amount or a
pension or a combination of both. The calculation of such benefit shall be computed by
considering several factors on the part of the employee such as the age of the employee, his
pay role, years of service provided by employee and salary at the time of retirement
(Stefanescu., Wang, Xie, and Yang, 2018).

(Defined benefit plan, 2019)
Factors of tertiary sector employees to decide the superannuation contribution in
defined benefit plan and other choice investment plan
It is not an easy decision for tertiary sector employees to select the appropriate investment
plan between both plans to invest their superannuation fund. While making such decision
various factors are considered by the employee due to the high-level uncertainty of the
financial results of both plans. The advantage and disadvantages attached to the plans are also
considered during the decision making. However, the factors can be changed with the
changing economic condition. The factors which are considered are mentioned below
(Collado, 2018).
 Financial stability: The factor which influences the decision of investment making at large
level is the financial stability of the employee. The employee who is making the investment
of his superannuation fund should be financially stable. The employees having strong
financial status are less interested in bearing risk and they generally go for the investment
choice plan. It is analysed that employees with limited financial stability are more interested
in the defined benefit plans due to the lower risk factor. For making the fair decision of
investment of superannuation fund there is a need to assess the financial stability of an
employee to obtain the better returns.
 Age of employee: The employees at their younger age are more interested in investing their
funds in investment choice plan because there is a large period between their investment and

retirement. The large period of investment enables them to effectively utilize the movements
to obtain more benefits. Also, they can change their portfolio as per the changes in the market
to gain high benefits. Similarly, the employees of older age are less expected to invest their
funds in investment choice plan due to the short time period and large risk factor. These
employees totally depend on their retirement benefits for their survival in the future (Bae et
al. 2018).
 Employee mobility: The employees who are used to switch their jobs in a very short time of
period also seem to be interested in the investment choice plan. The plan provides them the
option to keep together all the accumulated benefits from several employers. Also, the
employee can invest his amount as per his own will so the employees are preferred to choose
the investment choice plan as the option of defined benefit plan will result into the opening of
different defined benefit plans for every different employer under which the employee has
served. This results in the segregation of the overall benefits of the employees.
 Historical performance of the plans: While deciding about the option for investment the past
performance of both the plans is compared. The performance can be compared for the last
one year, six months or for quarterly. Also, the performance graph depends on the analysis in
which plan a large number of employees has invested. The historical performance depicts the
changes in return on the basis of capital invested by the investors (Yen, et al. 2016).
 Level of information available with the employees: The investment decision of employees
get affected by the knowledge they have about the current and past market performances of
the investment options and market conditions. The employees have a strong knowledge
regarding the market performances of each plan can wisely choose their investment option.
The employees with excessive knowledge are opting for the investment choice plan as such
information can be utilized to gain higher interest incomes. The less aware employees go for
the defined benefit plan (Lee, et al. 2017).
 Gender: The gender of employee has a significant role in the decision making regarding
selection investment option. It is observed that men are less risk-averse than women. Men are
likely to go for a more risky plan to gain higher returns on their investments.
 Sense of being secure: The sense of insecurity in the mind of employees also affects the
decision of investment. The employees who do not want to take more risk and have will to
invest in a secure investment plan generally opt the defined benefit plan due to the less
attached risk. On the other hand, the investment choice plan is more dependent on the market
movements and the security is uncertain in such a plan (Josa-Fombellida, López-Casado, and
Rincón-Zapatero, 2018).

Apart from all these above discussed factors, the personal interest of employee is a major
determinant in the selection of investment plan.
Issues of time value of money, tax deduction and other factors
The choice of investment of an employee for investing his superannuation fund also gets
affected by the time value of money as well as the concerned taxes in the economy. The
impact of these factors is discussed as follows (Lin., MacMinn, and Tian, 2015).
 Taxes: Taxation is imposing on the person to pay a certain amount to the government out of
his income. The income also includes the retirement benefit availed by the employee. There
are certain conditions where the person availing the retirement benefits is not needed to be
paid the tax on it. These conditions include incapacity or death of the employee. Apart from
these situations, all the employees are bound to pay taxes on these benefits. In defined benefit
plan the employee is liable to pay the tax on the amount of employer's contribution
accumulated during the working period of the employee. There is no additional tax would
apply in this case. It is analysed that the investment made in the portfolio of investment
which also added up with the interest fund. Hence the tax is imposed on both contribution
amount and interest income from the investment. Due to such reason, many employees
choose the investment option of defined benefit plan (Krishnan, Cumbie, and Ice, 2017).
 Time value of money: The concept of the time value of money enhances the worth of idle
money in the future. The concept is based on the theory that the value of one rupee would be
more than the value it will have in the future due to the inflation which will diminish its value
in the future. Hence, from the point of view of the time value of money concept the
investment choice plan will be the better one as the investment made by the employee in
present will come out in future as increased amount with the interest income. While in the
other investment plan of defined benefit, the accumulated amount of superannuation fund
shall remain the same and adds nothing (Cobb, 2015).
Conclusion
After the entire discussion about the employment benefits under the tertiary sector of
the economy, we can state that to motivate the employees to attract them towards such sector
of the economy it is required to provide them some benefits added to their salary. These
benefits, in addition, encourage the employees to go in the tertiary sector of the economy
instead of the primary and secondary sectors of the economy. In the end, after analyzing all

the investment plans and their relevant factors we can say that employees should go with the
investment option which provides them the higher returns and with the risk factor suitable to
them.

References
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