Defined Benefit Plan - PDF

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Territory Sector Employees
Superannuation contributions in the Defined Benefit Plan
Name of the Student

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Executive summary
In this report, defined investment plan and other investment choice available to
employees will be considered for the betterment of future benefits available for their
investment. With the changes in economy, due the time value of money, many employees
have to face high destruction in the value of their capital investment due to the several factors
such as time value of money, taxes and other implication which could negatively impacted
the value investment of employees. After that, it is inferred that territory sector employees
only invest their capital in the particular investment option which will create value of their
investment with the less risk.
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Table of Contents
Executive summary...............................................................................................................................2
INTRODUCTION.................................................................................................................................2
DEFINED BENEFIT PLAN.................................................................................................................3
INVESTMENT CHOICE PLAN...........................................................................................................3
FACTORS INFLUENCING THE INVESTMENT OF SUPERANNUATION CONTRIBUTION......3
EFFECT OF TIME VALUE OF MONEY, TAXES.............................................................................5
Recommendation...................................................................................................................................6
CONCLUSION.....................................................................................................................................6
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INTRODUCTION
With the changes in time, capital value of the people also gets depreciated due to the
negative factors of the economy. The tertiary sector employees the economy is indulged in
providing several sorts of services such as education, health and other busienss operations
which are indulged in providing services. Tertiary sector employees are the employees who
are providing their services in the multinational service operations around the globe. There
are several defined business plan and superannuation contribution which will add value to the
investment capital of the employees. It is analyzed that superannuation contribution is the
additional benefits available to investors. It is observed that by using the superannuation
contribution tertiary sector employees could multiply the earning of their investment. This
type of the superannuation funds plan add value to the investors to create value on the
investment and set up strong nexus between organizational growth and employees
development. There are many choices are available to investors in their superannuation funds
such as Defined benefits plan, mutual fund investment and systematic investment choice
plan. However, each and every tertiary sector employees need to evaluate whether the
investment option undertaken will be giving appropriate benefits to them with the less risk.
In this report, employees working in the tertiary sector such as education, health and other
busienss operations which are indulged in providing services to clients have been taken into
consideration
DEFINED BENEFIT PLAN
With the changes in time, tertiary sector employees has to face destruction in their
value of capital due to the time value of money. The defined benefits plan is the fund created
by the employers for the employees in which employer promise to pay lump sum money to
investors. As the name suggest the defined means the benefits which would be very well
known to the employees for their long term benefits. In order to compute the defined benefit
plan for the tertiary sector employees, we could use formula in which employees’ pay, final
salary, periodic investment in the funds and retirement time period will be used. After that by
using these all factors, final defined benefits amount will be determined for the employees.
Ideally, this defined business plan is followed when tertiary sector employees are not having
other better investment option (Boston, and Prebble, 2018).
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INVESTMENT CHOICE PLAN
After analysing the defined investment plan for the tertiary sector employees, it could
be inferred that the investment choice plan is accompanied with the selecting investment
project in which the % of the employee’s salary will be invested for the certain period.
Afterward, employees will get the total investment amount with interest. This investment
choice is also considered as accumulation plan which assists investors to cumulate their
earning for their better investment option. This benefit under the plan is highly dependent
upon the king of portfolio investment which assists investors to accumulate the funding.
Tertiary sector employees’ uses this funding to add value to their investment by keeping their
return reinvested in the invested plan (Boston, and Prebble, 2018).
FACTORS INFLUENCING THE INVESTMENT OF SUPERANNUATION
CONTRIBUTION
The investment in the superannuation plans by the tertiary sector employees is based
on the several factors. However, the major factor which influences the investment decision of
the tertiary sector employees is related to the risk and return available on the undertaken
investment option. It is observed that due to the high uncertainty involved in the
superannuation benefits plan, tertiary sector employees may find difficult to keep their value
invested in long run. The investment decisions of the employees is based on the risk, return,
beta of the particular investment project, time value of money and return offered by project
undertaken to them. Ideally most of the tertiary sector employees are indulge in considering
the tax exemption benefits plans which helps them to reduce their tax liabilities. In today’s
world, there are several investment options and benefits plans which have their own merits
and demerits (Bowen, 2018). Every employee’s analysis the investment decision on their
own based on their personal and economic factors. Ideally, investment decision in the defined
business plan is based on the return, lock in period and risk associated with the same. Every
employees needs to analysis that whether the return available on the superannuation funds is
more than the inflation rate of the economy. If the rate of return offered in less than the
inflation rate then it will destruct the value of their investment in long run (Kelbaliyev, et al.
2018).
In defined benefits plan, age of employees, investment option, return available to investors
and market risk are the major factors which directly and indirectly affect the investment
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decision of tertiary sector employees. If the market movement is high and return offered by
the market is less than the monthly return given under the defined benefit plan then tertiary
sector employees will invest their capital in defined benefits plan. The defined benefit plan is
accompanied with the less risk and offer good amount of return to employees which will
assist them to secure their future and formulate a strong retirement benefit plan (Khodaei,
2017).
However employees who are indulged in changing jobs frequently should choose investment
choice plan instead of the defined benefit plan. The return of the defined benefit plans goes
down with the increased number of jobs of the employees. Therefore, investment choice plan
will be beneficial for the tertiary sector employees who are indulged in changing their jobs
frequently (Park, 2017).
Another factor is related to the available information in the market for the defined benefit
plan and investment choice option. In case of choosing the defined benefit plan, an employee
does not analysis the available information as they directly know the return and risk
associated with the defined benefit plan (Stannard, 2017).
In case of investment choice plan, tertiary sector employees needs to analysis whether the
return offered by the investors is more than the inflation rate of the country. They also need to
analysis the lock in period and investment choice in the particular investment project (Suroso,
et al., 2017).
Time value of money is also important factors which might impact the investment decision of
the tertiary sector employees. If the inflow of cash after the certain period is higher in case of
defined benefit plan than then the investment option available in market then tertiary sector
employees should invest their capital in defined benefit plan (Stiff, et al. 2014).
The investment return on the investment choice plan depends upon the portfolio return
available in all securities. In case of defined benefit plan, tertiary sector employees will be
having less risk and average return. If the market factors are negative then in this case,
employees will invest their capital in defined benefit plan.
Historical performance of the investment options also plays major role while deciding the
investment decision in the particular available investment option. Past performance is used to
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compute the cost of capital and inflation rate which investors will have to use in determining
the benefits available to them in near future (Atanasova, and Chemla, 2016).
It is observed that tertiary sector employees who have core knowledge about the finance are
more inclined towards investing their capital in investment choice plan over the defined
benefit plan. As they think that by using the core financial information they could add value
to their return and increase the value of their investment (DAILY, KIEFF, and WILMARTH
JR, 2014).
In addition to this, those employees who are more likely to take risk of the market and by
using the fluctuated market factors want to invest capital in investment choice choose the
investment choice option over the defined benefit plan (Bodie, Marcus, and Merton, 2018).
EFFECT OF TIME VALUE OF MONEY, TAXES
It is observed that time value of money should be taken as prior concern before
investing capital in the particular investment option. In context with the time value of
money, the investment choice option turns out to be the better investment option for the
investors. It is observed that if investor’s finds rate of return offered by the defined benefit
plan by 4% and inflation rate of the particular country is 4.5% then in this case, employees
will be facing .5% of capital loss after the certain period. It shows that Tertiary sector
employees should invest their capital in the capital investment project or investment choice
which offer higher amount of return as compared to inflation rate of cost of capital. The cost
of capital could be computed by considering several factors such as purchasing power,
inflation rate and opportunity cost of the investment (Scott, 2014).
In context with the taxes, those tertiary sector employees who have higher salary will be more
inclined towards investing their capital in the defined investment plan. It will not only
increase the value of their investment but also assist them to save taxes on their salaries.
Taxes refer to the obligation of the employees to make payment on their earning to
employees. However, in case of defined benefit plan, tax deduction in limited but in case of
investment choice options, there are several options which could give higher tax exemption to
tertiary sector employees on their salary. Therefore, due to the high advantage, it becomes
easy for the Tertiary sector employees to choose investment choice option in their investment
(Gold, 2015).
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RECOMMENDATION
Every Tertiary sector employees should evaluate the risk and return associated with the
investment option.
The time value of money and investment risk based on the long term should also be analyzed
by the Tertiary sector employees before accepting the project (Schultz, 2009).
It is observed that if the market factors are positive and showing high return then tertiary
sector employees should invest their capital in investment option (Munnell, 2016)
After analysing all these factors and benefits available to tertiary sector employees, it could
be recommended that they needs to analysis whether investing in the defined benefit plans
will render them more benefits of not. The investment decision should be based on the return,
risk, inflation rate, cost of capital and other investment choices available for them in long run.
The tax exemption benefit is also another factor which needs to be undertaken by tertiary
sector employees before investing capital in particular project.
CONCLUSION
Tertiary sector employees are indulged in providing services to the society and
economic at large. It is observed that both investment option named defined benefit plan and
investment choice option based on the likeness and choices of different employees. The
investment in the superannuation plans by the tertiary sector employees is based on the
several factors. Now in the end, it could be inferred that if market factors are positive and
employees could take more risk than they should invest their capital in investment options.
The investment plan giving higher return and less risk should be accepted by the territory
sector employees. On the other hand, if tertiary sector employees do not want to take risk
then they should keep their money invested in defined benefit plan. Each and every
investment option has its own pros and cons which need to be analyzed by the tertiary sector
employees before investing capital in particular investment project.
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REFERENCES
Atanasova, C. and Chemla, G., 2016. Familiarity breeds alternative investment: Evidence
from corporate defined benefit pension plans.
Bodie, Z., Marcus, A.J. and Merton, R.C., 2018. Defined benefit versus defined contribution
pension plans: What are the real trade-offs?. In Pensions in the US Economy (pp. 139-162).
University of Chicago Press.
Boston, J. and Prebble, R., 2018. The role and importance of long-term fiscal
planning. Policy Quarterly, 9(4).
Bowen, H. 2018. Investment in learning: The individual and social value of American higher
education. Routledge.
DAILY, J.E., KIEFF, F.S. and WILMARTH JR, A.E., 2014. Introduction. In Perspectives on
Financing Innovation (pp. 13-16). Routledge.
Gold, J., 2015. Accounting/actuarial bias enables equity investment by defined benefit
pension plans. North American Actuarial Journal, 9(3), pp.1-21.
Kelbaliyev, G.I., Mammadova, G.M., Samadli, V.M., Talibov, N.H. and Samedov, M.M.,
2018. Theoretical and Experimental Investigation on Granulation Processes of Powdered
Materials in Cylindrical Granulator. J Chem Appl Chem Eng 2, 1, p.2.
Khodaei, A., 2017. Provisional microgrid planning. IEEE Transactions on Smart Grid, 8(3),
pp.1096-1104.
Munnell, A.H., 2016. Employer-sponsored plans: the shift from defined benefit to
defined. The Oxford handbook of pensions and retirement income, 13, pp.359-380.
Park, R., 2017. Value engineering: a plan for invention. Routledge.
Schultz, R.S., 2009. Employee benefit planning. Journal of Financial Service
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Scott, T.W., 2014. Incentives and disincentives for financial disclosure: Voluntary disclosure
of defined benefit pension plan information by Canadian firms. Accounting review, pp.26-43.
Stannard, J., 2017. Reshaping the default fund process. Superfunds Magazine, (423), p.10.
Stiff, G., Sharpe, M. and Atkinson III, L.W., Genworth Holdings Inc, 2014. System and
method for imbedding a defined benefit in a defined contribution plan. U.S. Patent 8,799,134.
Suroso, E., Satyajaya, W., Utomo, T.P. and Julianti, L., 2017. Financial Feasibility Study of
Liquid Smoke Industry from Palm Oil Empty Fruit Bunch in Mesuji Regency, Lampung
Province. INSIST, 2(1), pp.23-26.
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