Comprehensive Report: Defined Benefit Plan Analysis and Considerations

This report delves into the intricacies of Defined Benefit Plans (DBP), focusing on factors employees must consider when deciding whether to invest. It explores the Australian government's role in promoting retirement savings and mandates for employer contributions. The report outlines critical considerations for employees, including fluctuating transfer values, the security of the DB scheme, government regulations, investment choices, and historical performance. Furthermore, it addresses the impact of the time value of money (TVM) and taxes on investment decisions, emphasizing how these elements influence the present and future value of investments, influencing investment choices and tax planning. The report underscores the importance of professional advice in making informed decisions regarding DBPs, highlighting the complexities of investment and the need for expert guidance.

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DEFINED BENEFIT PLAN
By (Student’s Name)
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Introduction
This Paper discusses issues that deal with the investment choice plan or Defined Benefit
Plan. The focus on encouraging and superannuation people to invest and save for their future,
specifically to help them when they retire, has been strengthened by various governments
especially the Australian government for the past years. The Government especially the
Australian government has been at the front in enforcing the idea to the people by enacting it as a
rule to all the Companies and different institution. The government mandated minimum amount
to be contributed to the retirement funds by all the employers. The employees are also compelled
to apportion a certain percentage of the total amount of money that they are earning to
superannuation investment (Lusardi, Michaud and Mitchell 2017). The main reasons for the
introduction of these policy initiatives were to help people reduce the burden that is associated
with the social security system and to give them enough support during the stage of the
retirement of their life. Defined Benefit Plan (DBP) is a situation where the employees’ benefits
that are being paid to them at their retirement are arrived at using a formula. This formula takes
into consideration various determinants for example employees’ age, average salary as well as
the total years that employees spent on their job. This paper explains in detail on factors that the
employees have to consider before making a decision on whether to transfer their funds to DB
plan and the various issues that relate to the time value of taxes and money that are essential in
the decision-making process (Phelps et al. 2018).
a) Factors that the employees should consider are the following:
Changing transfer values

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The employees have to find the transfer values; this is because the Defined benefits Plan
transfer values keep on fluctuating every year based on different factors such as mortality rates
and investment performance (Sialm, Starks and Zhang 2015). This usually affects the DB
scheme values and contributes to a change in the calculation of the transfer values. The
employees have to ensure that they select the best time that the scheme will give them enough
benefits in the future (Goldhaber and Grout 2016).
Will the DB scheme payout?
The employees have to consider whether the scheme will pay out in the future. They have
to ensure that the DB scheme is secure. They should participate in a scheme that will pay them
continuously as promised without any problem in the future. The employees has to take into
consideration the transferring out if the organization is in risky financial position, but they should
first seek advice from different professionals to weigh up the available options before making a
step in their own decision (Benartzi, Previtero and Thaler 2011). This will help them in the event
the organization is insolvent. It advisable that the employees should not engaged in any kind of
business with the organizations that are in risky financial situations.
Comparison on an annuity against the value
Employees should compare and look at the type of pension fund which are being offered
by other alternatives schemes that buy related income to those offered by the Defined Benefits
scheme and then compare their benefits using index-linked and joint life. They should select the
scheme that will give them higher value in the future (Malmendier and Nagel 2011).
The government rules and regulation

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Some of the regulation and legislation that the government may enact may increase the
administrative and complexity burden to the DB scheme. The burden may be transfer to the
employees who invested their funds on the Defined benefits scheme (Adams and Rau 2011).
The tertiary sector employee should therefore consider the government policy that
regulate DB scheme. Some of the government rule and regulation may also be put in place with
the intention of motivating more people to participate in that investment plan. The employees
should not engage in the process in case the government burns the all process.
Investment choice
The DB scheme offer their members various superannuation funds such as a choice of
existing investment option, normally with a default as well as higher and lower risk option.
Another choice is where the members are doing it by themselves option where individual creates
their own choice from a list of asset classes, such as equity, cash and fixed interest securities.
Employees have to make appropriate decision based on the financial education on the selection
of the best suitable investments choice that they should take. Most of the researchers state that
most of the employees in Australia are ill-equipped and ill-informed for the decisions regarding
their superannuation decisions (Feldman and Beehr, 2011). Evidence also shows that most of the
employees make the wrong choice on the type of the investments that will better their future life.
Historical performance
The employees must take into consideration the past performance of the DB scheme
investments options. The comparison of the historical performance of new and old choice will
provide accurate information about the Defined Benefits Plan because they will have to measure
the last performance and then then use the analysis to determine the future performance
(Dimmock, Kouwenberg, Mitchell and Peijnenburg 2016).

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Is there the need for the cash in the future?
The tertiary sector employee needs to ensure that they have a definite future purpose for
the Money that they want to invest; this is because tax implication affects the amount that they
want to spend. The tax implication will change the amount that they plan to invest in various
ways. It will mostly affect it during the transferring stage of cash. Generally, the first 25% is not
being the tax, but the remaining amount is taxed mainly at a marginal rate of the total income
tax. In case the cash stays in a bank account of the employees afterward, then the interest will be
subjected to income tax (Curcuru, Heaton, Lucas and Moore 2010). Similarly, there is a question
that may arise about whether it’s good to have a guaranteed income or a cash lump sum; the
main influential factor here to be considered is the schemes commutation factors. Investment is
mostly more important to those employees such as, those that do not need dependent benefits
requires a significant amount of money to settle off debts or to start a business opportunity and
someone who is seriously ill (Hitchcox et al. 2018).
When making the decision, employees have to ensure that all the information regarding
the appropriate pension schemes by taking advice from different experts. The employees need to
understand how the Defined benefits Plan functions. The precise information will enable the
employees to make the best decision on the type of the investments choice to take that will bring
out the return in the future (Iyengar and Kamenica 2010).
Professional advice
Lastly, be undertaking any investment plan, it is always advisable for all the employees to
seek professional advice from different people to help them in the decision-making process
(Yogo 2016). This will enable them to gain knowledge and skills in choosing coming up with
favorable investments plan which will add value to their invested amount. The employees should

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not only depend on the formula, should consider other factors which can only be provided with
the help of the professional advisors.
b) Issues that relate to the concept of the TVM and taxes that may help in the
process of decision making.
Various factors may affect decision-making process especially the financial decision
making of any person wishing to start an investment plan. The factors that may influence the
decision-making process of any person for example employees include demography variables
such as age, occupation, and gender as well as individual financial risk tolerance. For this part,
we will look at the issues in TVM and taxes that affect the decision-making process. The concept
of TVM states that cash available now (present time) has more value than the similar amount of
money that will be available in the future (Van, Lusardi and Alessie 2012). This will depend on
the earning capacity of the stated amount. This is because the concept indicates that the present
amount of money will increase due to the interest earned in the process. It is also essential to
spend the amount immediately because the inflation may make the same amount valueless in
future regarding buying power. Time value of money is mostly used in the decision-making
process because it offers decision makers with an accurate figure of the returns and benefits
which they see on the investment opportunities. They will be able to use TVM over time to
identify potential risks and forecast cash flow, of which are the critical factors that affect the
investments decision-making process. An individual can use the time value of money to decide
on whether to invest in a particular investment process. Present value can be used to find out the
amount that the future cash flow worth at the current time. The idea that states that money worth
more now than the prospective amount cannot exist without the interest as a factor. There are

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two different type of interest that is compound and simple. These two types of interest will affect
the invested amount differently (Fan, Titman and Twite 2012).
Tax planning: Taxes affect the decision-making process of investment because it mostly
postponed the recognition of income as well as accelerating deductions. The concept of tax is
similar to that of the TVM concept which states that the present amount of money is worth more
than the same amount of money in future. By increasing deductions, an individual will reduce
their taxable income thereby remaining with a smaller balance owed. The tax regime is a
significant factor may influence investment positively or negatively. If The tax system is
attractive to any form of investments, then individuals will make a higher amount of money
based on their investments choice. The policymakers should, therefore, relive the tax burden by
putting in check both tax administration and compliance costs.
Conclusion
The paper discussed in detail the essential factors that the employees have to consider
when deciding on whether to put their funds on the Defined benefits plan. There are the various
factors that employees have to consider factors such as the investment choice, government
regulation and legislation, historical performance and the benefits that the employees will get as
a result of investing in the scheme (Marglin 2014). It is true that the past performance can easily
motivate employees to take investment choice if the existing employees obtained benefits from
the DB scheme. The paper also discussed issues that are in both the time value of money and
taxes that affect the decision-making process in a particular investment plan.

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References
Adams, G.A. and Rau, B.L., 2011. Putting off tomorrow to do what you want today: planning for
retirement. American Psychologist, 66(3), p.180.
Benartzi, S., Previtero, A. and Thaler, R.H., 2011. Annuitization puzzles. Journal of Economic
Perspectives, 25(4), pp.143-64.
Curcuru, S., Heaton, J., Lucas, D. and Moore, D., 2010. Heterogeneity and portfolio choice:
Theory and evidence. Handbook of financial econometrics, pp.337-382.
Dimmock, S.G., Kouwenberg, R., Mitchell, O.S. and Peijnenburg, K., 2016. Ambiguity aversion
and household portfolio choice puzzles: Empirical evidence. Journal of Financial
Economics, 119(3), pp.559-577.
Fan, J.P., Titman, S. and Twite, G., 2012. An international comparison of capital structure and
debt maturity choices. Journal of Financial and quantitative Analysis, 47(1), pp.23-56.
Feldman, D.C. and Beehr, T.A., 2011. A three-phase model of retirement decision
making. American Psychologist, 66(3), p.193.
Goldhaber, D. and Grout, C., 2016. Which plan to choose? The determinants of pension system
choice for public school teachers. Journal of Pension Economics & Finance, 15(1), pp.30-54.

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Hitchcox, A.N., Patel, C., Ramsey, C.J., Studd, E.L., Ma, L.T., Elliott, M.B. and Keogh, T.W.,
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discerning money?. The Journal of Finance, 70(2), pp.805-838.

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Van Rooij, M.C., Lusardi, A. and Alessie, R.J., 2012. Financial literacy, retirement planning and
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