Defined Benefit Plan: Superannuation Contributions and Investment Choice Plan

Defined Benefit Plan 1
DEFINED BENEFIT PLAN
By (Student’s Name)
Professor’s Name
College
Course
Date

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DEFINED BENEFIT PLAN
Introduction
This paper discusses the superannuation contributions made by the tertiary sector
employees to investment choice plan or Define Benefit plan. Superannuation is a platform which
is mostly being established by the government or the company and put forward as a rule with the
intention of valuing the employees after their retirement from the work process (Yao, Lix,
Shevchuk, Tear and Blackburn 2018). The employees are being deducted from their income, and
the money is transferred to their account to earn interest. The superannuation contribution aims
to cater for the saving and investments of the employees for their future benefits. The
superannuation contribution is made up of the employer contributions and personal contributions
that are in the form of assets, or in most cases cash amount, that is paid with the intention of
abiding by superannuation fund, for the future use by the individuals under retirement age.
Investment earnings and superannuation contributions are vital to accumulating a significant
retirement nest egg. Employees can make two kinds of superannuation contribution to their super
funds (Fan, Titman and Twite 2012). Their employer can either make concessional contributions
to their super fund. Or they can make after-tax contributions to their super fund. A non-
concessional, also called after-tax contribution is a payment that is made into the super of the
employees from their after-tax income. The amount of money in this account is tax-free as the
employees already paid tax for the money at the standard rate of tax (Gilson and Gordon 2013).
A concessional contribution also called a before-tax contribution is the amount of money that the
employees put into their superannuation from their before-tax income. This program has allowed
work to gain a good understanding of the main advantages of saving for the future, most of the

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people who had to retire can benefit from the program thereby eliminating most of the financial
crisis that affects their lives during retirement stage (McCarthy 2013).
It is also essential to understand the meaning of the Tertiary sector employees. To start
with, service sector or Tertiary sector is where the production of services takes place. It is one of
the three economies sectors. The first economy sector performs the duty of creation of raw
materials. The second sector named as secondary convert raw material to finished goods. The
third sector which is called the tertiary sector deals with the marketing and selling process of the
products (Gilson and Gordon 2013). Services may include advice, experience, attention,
productive labor and discussion. The actual information production can also be named as a
service. Therefore, the tertiary sector employees are the workers or employees who are involved
in the provision of services to the final consumers and other businesses. The services that they
may offer include a sale of commodities, transport and the distribution of goods, as may occur in
retailing and wholesaling. The tertiary sector employees can also represent the individuals who
have the business in the tertiary sector economy (Hopkins 2011).
Define benefit plan offers employees with a fixed, predetermined amount of money as a
pension on retirement. The payout or benefit is calculated using a formula which depends on the
duration the employee has taken in the job market and the salary he/she has contributed as the
superannuation funds (Protection and Act 2010). The employer pays most or all of the funds as
well as deciding where the employees should invest the funds. The employee obtains the defined
amount as promised regardless of whether the amount spent in determined benefit plan yield
more or less returns. There are different types of Retirement plans such as a defined contribution
plan and Defined benefit plan (Stohl and Chen 2018).

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Essential factors that Tertiary sector employees should consider before investing in
investment choice plan.
There are many factors which the Tertiary sector employees have to consider when
deciding whether to be part of the Defined benefits plan. This is because DB scheme is a type of
investments plan and there are varieties of risks which the employees will encounter. The two
main factors which the employees have to consider is time and risk tolerance. Before the
employees undertake any decision regarding the investments, they have to take a look at
themselves and check at their financial situation. The first step is for them to figure out their risk
tolerance and goals either with the help of the experts or on their own. This is because it is not
assured deal that the money invested will yield a good return in the future (Hawley, Johnson and
Waitzer 2011). Time may represent the duration after the retirement that the employees will take
to receive the amount invested. The time duration should be short to allow the employees who
have retired from the work to satisfy their demand out of the money spent on the scheme. There
are inherent risks that are associated with all types of investments. The employees have to
understand all the types of changes that they will encounter during the process, and this will act
as the first step of managing those kinds of risks. The other kinds of risks that are associated with
the investment in DB scheme include inflation which increases the cost of living and devalues
the dollar; it mostly reduces the purchasing power of the amount of money (Paradi, Sherman and
Tam 2018). This means that the members of the DB scheme will withdraw a significant amount
of money to maintain their living standard. Another type of risk is the interest rate; low-interest
rate may affect the overall outcome of the amount invested in the scheme. Lastly, there may be
accounting risk in that the FASB can change disclosure and accounting requirements for Defined
Benefit Plan (Rauh, Stefanescu and Zeldes 2017). It is therefore advisable for the Employees to