Choosing Superannuation Plans: Factors for Tertiary Employees

This report examines the crucial factors tertiary sector employees should consider when deciding between an Investment Choice Plan and a Defined Benefit Plan for their superannuation. The report highlights the importance of understanding risk tolerance, benefits offered, vesting periods, and the potential for returns. It delves into the implications of the 'time value of money' and tax considerations, emphasizing how early investment and the choice of plan can impact future financial outcomes. The analysis covers key aspects such as the availability of investment options, insurance coverage, and the impact of fees on long-term savings. The report underscores the need for employees to carefully evaluate their individual circumstances and financial goals to make an informed decision that aligns with their retirement objectives. It stresses the importance of considering both the stability offered by defined benefit plans and the potential for growth offered by investment choice plans. This report provides a detailed overview of the factors involved in choosing a superannuation plan, providing valuable insights for employees in the tertiary sector.

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Factors to be considered by tertiary sector employees when deciding whether to opt for
their superannuation in the Investment Choice Plan or Defined Benefit Plan.
Over the past decades, employees have been encouraged to save and invest for the future and
most especially at the time of retirement. The government of Australia has been quite pro-active
in the above regard, through making it mandatory for employers to make minimum
contributions to the different retirement funds or superannuation on behalf the
employees(Dvorak, 2012). The percentage contribution by the employer to the superannuation
has been steadily increased from 3 percent when it was first introduced, and to date, it stands at 9
percent (Kagan, 2018). The employees, as the beneficiaries, often make contributions of a
specific percentage of their earnings to the fund. Before the superannuation fund, the social
security system provided pension payments to support individuals in their late years of
retirement, and the order was overwhelmed thus the introduction of the superannuation
fund(Dvorak, 2012). Following the many years of contribution by employees, superannuation
and mutual funds have accumulated billions of dollars which they invest for profit so that their
members can get sufficient incomes when they retire.
There are quite several superannuation providers in Australia, such as AMG Super, Catholic
super, and UniSuper. It is considered among the largest individual and industry-based
superannuation funds. Moreover, it manages employees' superannuation's in the sector of
education (GERRANS and CLARK, 2013 p.353.). All these superannuation fund providers offer
many products related to the superannuation fund and retirement plans, and the members are

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presented with choices between which plan to choose, whether a investment Choice Plan or
Defined Benefit Plan, before one is to choose between which plan to place their fund, there are
several factors to consider.
Risk is one of the factors a tertiary employee should consider when deciding which plan to place
his or her superannuation benefit. Under a Defined Benefit Plan which is also referred to as a
pensions plan, the retirement benefits are paid using a specific formula. The factors considered in
the calculations are the final salary amount, age at retirement, the number of years the individual
has been in employment, the total direct contribution amount from the employee, (Kagan, 2018).
In this plan, both the employer and the employee know the formula used to calculate the benefits.
Therefore, it is fixed and not dependent on the returns from the investments for the
company(Anspach 2018). With this plan, the company managing the superannuation fund
invests the funds, but it bears all the risks such that in the events of losses, the beneficiary is not
affected. The Defined Benefit Plan is usually adopted by risk-averse individuals who fear risks
and would prefer to earn small than their money being subjected to risk(Kagan, 2018). This plan
guarantees specific pay out when an employee has retired, and the payments may monthly until
the employee dies. Since the final pay amount of an employee is factored in the formula for
calculating the benefits, the employee has the liberty serve longer at the job so that his final
salary is much more significant because the longer one stays on the job, the more increments for
salary and even promotion (Kagan, 2018). Meanwhile, for employees that make choice of the
Investment Benefit plan, they stand a high risk and hope for higher payments when they retire.
Another factor to consider is the benefits that are provided. Many pension plans offer different
benefits, so before selecting which plan to take, it is crucial to consult a professional to make
sense out of the plan(Kagan, 2018). The investment choice benefit plan, which is also referred to

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as a defined contribution plan, puts the risk of investment onto the employee, but the benefits are
worth. In today’s work environment, employee mobility is at its peak and employees keep
moving from one job to another so in this case a transferable plan is preferred because it allows
employees to roll over their funds to another employer (Loy, 2017). Moreover, some companies
offer exclusive services like financial advice, investment advice as part of the package for the
investment choice benefit plan which service in other plans would have been paid for. When
such services are provided free, it reduces the service costs, and at the time of retirement, there is
a reasonable payment.
When one gets the job and is presented with the option of which retirement plan to place his
super, one of the factors to consider is when the benefits vest(Kagan, 2018). Under the Defined
benefit plan which most for public servants, the vesting period is ten years and with the
investment choice benefit plan or the defined contribution plan is the only year. If an employee
hopes not to keep the job for long, then definitely it should be the defined contribution because,
for example. An employee who begins work today and works for four years and then quits, he
would be liable to getting his benefits for the four years if he/she had signed the defined
contribution benefit plan. However, for the defined benefit plan, the employee would get nothing
because the time of ten years to vest his benefits will not have been served (Carter, 2018).
Chasing returns. Some employees who are calculative and would like to earn significant sums
after retirement would choose the investment choice benefit plan since the payments are
dependent on the returns from the investment made(Kagan, 2018). Another advantage to this
plan, the employee and the employer does not pay taxes while contributing, and the taxes are
only charged when one is withdrawing or making an early retreat. At retirement, one has an
opportunity to get a lump sum and may choose to invest in big projects since he now arrives a

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long time saving, which has accumulated over time(Kagan, 2018). Here an employee risks the
benefits of being paid in installments and decides to invest on his own and lives the rest of his
life on the investment he has made.
When an employee is making a choice among the available plans, the question to answer should
be. "Do you prefer the stability of flexibility?" The Defined benefit plan would provide an
annuity at retirement, whereas the investment choice benefit has an option of withdrawing the
whole lump sum. Such that if an employee is willing to withdraw all his savings and invest as he
pleases, it is possible which is not possible with a defined benefit plan(Investopedia 2019). An
employee that is seen to be more conservative with his or her investments or does not have good
choices in terms of investments, does not have to worry about choosing investments. The
Defined benefit plan offers a stable and guaranteed payment after retirement(Kagan, 2018). The
disadvantage with this is the employers are not willing to provide this kind of retirement plan
since the employers bear more burden than the employee. So it is more common with public
service or government who contribute almost all the contributions.
Among the essential factors to consider while choosing a plan is the investment options
available. An employee should select a plan that has a variety of investment options for one to
choose and invest. The investment choice benefit plan leaves a member with several choices for
ventures to invest his superannuation fund. For example, when an employee is still young, the
funds may be invested in long term low rate paying stakes but with also a small risk because the
employee has much time before retirement(Biggs, 2018). The long secure but low paying
venture is meant to make sure that the funds are not at risk like when invested in the short term
and high paying ventures which are risky.

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Insurance is in most cases considered a vital factor when making choice of a plan to place one's
superannuation contributions. Most funds offer insurance for their members; however, one
should scrutinize the kind of insurance policies these fund offer(Biggs, 2018). Others provide
income protection, permanent disability, life, and what is important is to ascertain the costs
involved, bearing in mind the very cheap ones may not be the best(Kennon 2018). Choosing a
moderate insurance company that charges reasonable fees would save from being overcharged
and also carefully selecting the policies to ensure against although most superannuation fund
management companies dictate which policies should be used.
As elucidated in the above paragraphs, the length of employment along with the salary history
are critical aspect that must taken into consideration. Therefore, the extent to which the income
will be able to grow at the time of retirement need to be considered after performing the returns
at the time of retirement. The issue of fees charged on the accounts either monthly or annually
cannot be overlooked as the fees detract from the savings directly impacting the final retirement
payout. Annual fees may seem small, but because the plan is for an extended period, the fees
accumulate, and at the time of payment, a significant difference is realized (Chen and Hao, 2013
p.164). Annual fees range from hundreds of dollars to thousand, so searching for a low fee fund
is the ultimate deal. Some fund managers pass policies to charge exorbitant fees because they are
driven by making profits for the company, and therefore, choosing fund companies that are not
so much driven by profit would save from high fees. Therefore, how much each of the above
plans yields at the time of retirement is a critical aspect that must be calculated before decision is
made.
Time value of money, opportunity cost and taxes' issues in the decision-making process
Time Value of Money (TVM)

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Time value of money in simple terms means that the money owned today has more value
compared to the money that is received in the future (Verbooy et al., 2018 p.1430). Therefore
financial experts agree that when an investment is made early, time passes and the initial value is
increased and on the other hand, money which is delayed and received later results in
opportunity cost. The concept of "time value of money" affects significantly how workers
choose the type of superannuation plan. Employees who decide to put their contributions under
the "defined benefit plan" are likely to forego their future value of money because with a
"defined benefit plan," and the inflationary tendencies are not countered (Verbooy et al., 2018
p.1430).
Moreover, employees who choose investment choice to benefit plan, their future value of the
payments are adjusted to time value because their funds are invested, and the earnings from the
investments. So the "time value of money" becomes a significant factor in choosing a plan where
to place employee superannuation contributions. Therefore an employee who cares about his
future value of money to be received after retirement should choose the defined contribution
plan (Lewin and Cachanosky, 2015). However, with all the facts about the "time value of
money," some employees are too risk-averse, and for that reason, they still choose the "defined
benefit plan" partly because "investment choice plan" has a reliable return since the markets are
always fluctuating.
Taxes
When employees are choosing which plan to place their superannuation contributions, they
should bear in mind the tax implications(Bishai, 2014 p.1520). Under the defined contribution
plan or the investment choice benefit plan, both the employer and the employee don’t pay tax
meaning the taxes are differed(Gugl and Zodrow, 2015 p.770). A tax is only charged when an

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employee is withdrawing, and on top of the taxes charged when withdrawing, more taxes are
subjected when an employee makes an early withdraw however exemptions are made when the
money is withdrawn for purposes of sickness, and other hardships(Gugl and Zodrow, 2015
p.770). The defined benefit provides the employees a specific payment periodically or quarterly,
and in contrast, the investment choice plan, a member owns the account where the balances
depend on the past contributions and also the earnings from the investments.
Opportunity Cost
According to Kenon, (2018), the opportunity cost is the second best alternative when a choice is
made. That whenever one makes a choice, there is a tradeoff. When employees are choosing
between the "defined benefit plan" and "investment choice benefit plan," they should know that
is an opportunity cost(Gabillon, 2013). The above is based on the need to keep the money to be
used in the future when they retire instead of using it now. Therefore, since the employee is
losing money now and saving it for the future, it is essential that he chooses a plan that he thinks
will yield the most and secure income. Placing the employee contributions under the defined
contribution plan presents both risks and benefits because when the investments perform
excellently, there are better payments at retirements, and the reverse is true (Gabillon, 2013). So
when the investments perform better, and the payment are reasonable, it means the opportunity
cost paid off. For the "defined benefit plan," the pay is often fixed, and the employee quickly
knows the outcome of the scheme (Polley, 2012). So when choosing which superannuation plan
to place the employee contributions, the opportunity should be a factor because for an employee
to gain in future, he/she should have chosen a plan that is high paying in terms of retirement.

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References
Anspach, D., 2018. How to Calculate Present Value for Retirement, Before Retirement. The
balance. [Online] Retrieved from the web: https://www.thebalance.com/what-is-present-value-
and-why-is-it-important-2388489 [Accessed: 17th May 2019]
Biggs, A., 2018. Investment-Based Transition Costs Associated with Closing a Public Defined
Benefit Pension Plan. SSRN Electronic Journal.
Bishai, D., 2014. Generalized Nutrient Taxes Can Increase Consumer Welfare. Journal of Health
Economics, 24(11), pp.1517-1522.
Carter, E., 2018. Choosing Between A Defined Benefit And Defined Contribution Retirement
Plan, Forbes. Personal Finance. [Online]. Retrieved from the web:
https://www.forbes.com/sites/financialfinesse/2018/09/16/should-you-choose-a-defined-benefit-
or-defined-contribution-plan/[Accessed: 17th May 2019]
Chen, S., and Hao, Z. 2013. Funding and investment decisions in a stochastic defined benefit
pension plan with regime switching*. Lithuanian Mathematical Journal, 53(2), pp.161-180.
Dvorak, T., 2012. Timing of Retirement Plan Contributions and Investment Returns The Case of
Defined Benefit versus Defined Contribution. The B.E. Journal of Economic Analysis & Policy,
12(1).
Gabillon, E., 2013. When Choosing is Painful: A Psychological Opportunity Cost Model. SSRN
Electronic Journal.
GERRANS, P., and CLARK, G. 2013. Pension plan participant choice: Evidence on defined
benefit and defined contribution preferences. Journal of Pension Economics and Finance, 12(4),
pp.351-378.

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Gugl, E., and Zodrow, G. 2015. Competition in Business Taxes and Public Services: Are
Production-Based Taxes Superior to Capital Taxes?. National Tax Journal, 68(3S), pp.767-802.
Investopedia.2019. Defined-Benefit Plan. [online] Available at:
https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp [Accessed 17 May 2019].
Kagan, J., 2018. Defined-Benefit Plan, Retirement. Investopedia. Accessed from:
https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp [Accessed: 17th May
2019]
Kennon, J., 2018. What is the opportunity cost?. The balance.[Online]: Retrieved from
web:https://www.thebalance.com/what-is-opportunity-cost-357200[Accessed:17th May 2019]
Lewin, P., and Cachanosky, N. 2015. The Time-Value of Money and the Money-Value of Time:
Duration, Roundaboutness, Productivity, and Time-Preference in Finance and Economics. SSRN
Electronic Journal.
Loy, J., 2017. Consider Many Factors When Choosing Retirement Plans and Options. State
College, PA. [Online] Retrieved from the
web:http://www.statecollege.com/news/columns/consider-many-factors-when-choosing-
retirement-plans-and-options,1473426/[Accessed: 17th May 2019]
Polley, W., 2012. The Rhetoric of Opportunity Cost. SSRN Electronic Journal.
Verbooy, K., Hoefman, R., van Exel, J., and Brouwer, W. (2018). Time Is Money: Investigating
the Value of Leisure Time and Unpaid Work. Value in Health, 21(12), pp.1428-1436.

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