Defined Benefit Plans for Territory Employees: A Financial Analysis

This report provides a comprehensive analysis of defined benefit plans and investment choices for employees, particularly those in the tertiary sector. It explores the core concepts of defined benefit plans, investment choice plans, and superannuation contributions, highlighting the key factors that influence investment decisions. The report delves into the impact of the time value of money and taxes on investment strategies, offering insights into how these factors shape financial outcomes. It considers various influencing factors, such as employee age, financial status, and mobility, along with external market dynamics, to provide a nuanced understanding of the investment landscape. The report also offers a recommendation to help employees make informed decisions and optimize their superannuation plans for long-term financial security, emphasizing the importance of considering both risk and return. The analysis underscores the significance of informed decision-making in managing superannuation funds to maximize benefits and achieve financial goals.

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Superannuation Contributions in the
Defined Benefits Plans

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Table of Contents
Executive Summary.....................................................................................................................................................3
INTRODUCTION...........................................................................................................................................................3
DEFINED BENEFIT PLAN...............................................................................................................................................3
INVESTMENT CHOICE PLAN.........................................................................................................................................3
INFLUENCING FACTORS TO THE INVESTMENT OF SUPERANNUATION CONTRIBUTIONS............................................3
EFFECT OF TIME VALUE OF MONEY, TAXES.................................................................................................................3
RECOMMENDATION....................................................................................................................................................4
CONCLUSION...............................................................................................................................................................5
References...................................................................................................................................................................6

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Executive Summary
In today’s economic environment, due to the changing economic theories and the complex
business approaches, the tertiary sector employees are moving to get better returns along with some other
benefits to put more endeavors in the value added activities of an organization. Employees are working in
different sectors under an organization and provide their services for the progress of the organization. The
tertiary sector of the economy is the service industry; these employees provide their services in different
service economy such as education, health, insurance and banking. They provide services to the general
population. In such description, we discuss about the significant factors that needs to be contemplate by
the tertiary sector employees before deciding to place their superannuation contributions in the Defined
Benefit Plans or Investment Choice Plans.
INTRODUCTION
The tertiary services consists the production of services instead of the production of any end
product. These are intangible but require a lot of attention, advice, experience and affective individuals to
provide such services. This is an arrangement to provide the services from business to the final consumer.
They perform as an interlinking chain between the business and the consumer. These Services may
involve the service under health, banking, education and insurance sector. It also includes several kinds of
other services such as transport, entertainment, sales and all the services which are related to the
hospitality.
The tertiary employees are in pace to gain their better salaries and also some other benefits.
Superannuation benefit is one out of those major additional benefits. Superannuation is a kind of a benefit
that is offered to the employees by their employer. The employer makes a contribution every year on the
behalf of the employees towards the superannuation policy held by the employer. The employee too
deposits an amount towards such policy through the deduction from his salary. This is a kind of pension
plan. Most of the companies offer a superannuation benefit to their employees as an added incentive to
work for longer tenures with the company. It encourages the employees to improve their performance and
also provide them a financial security (Butler, 2016).

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DEFINED BENEFIT PLAN
Defined Benefit plan is an employer sponsored retirement plan, where the benefits to employee
computed after considering various related factors such as tenure of his service, age and the salary history.
The employer made a periodic contribution to such fund and the contribution rate is periodically observed
by an actuary. The size of the superannuation fund depends on how well the employer did managing the
money. This is simply a function of a basic formula which includes the factors in how long the employee
worked for the company and how much he earned.
Such amount of fund is promised to be paid to the employee at the time of his retirement. At the time of
retirement, the employee has two options. He can choose to withdraw the entire amount of fund of
superannuation fund or he can use that fund as a pension product.
INVESTMENT CHOICE PLAN
The most significant decision, which the employee will have to make about his retirement income,
is to choose the right superannuation fund. In such investment plan the employer makes a fixed
contribution to this fund and the employee can also make his voluntary contributions towards the funds as
well. So it’s vital that you have the right fund for your needs. While making the investment, Knowing the
superannuation benefit and superannuation amount is important for employee for better investment. It is
an accumulation plan of income. In this plan the employee is in the power to get his income accumulated
at any higher rate of interest. The returns and benefits under this plan depend upon the chosen portfolio of
investment by the employee for the accumulation of his income (Butler, 2016).
INFLUENCING FACTORS TO THE INVESTMENT OF SUPERANNUATION
CONTRIBUTIONS
It is a major financial decision on the part of the employee to choose the investment choice plan
for his superannuation funds. Due to the uncertainty and risk factor the employee falls in a situation where
he makes decision on the basis of several parameters even if they are not related to the final benefits that

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they will be getting in the future. Every investment plan has its own pros and cons. The thinking and
decision making theory of every employee varies from one to another, that leads them to make an overall
analysis of possible results/outcomes from every investment. The outcomes from any investment based on
the various factors such as the age of employee, financial stability, mobility of employee. Apart from that
many outside factors like inflation, market, interest rates etc. also influences the possible outcomes of an
investment (Evans, and Razeed, 2017).
The age of employee is a significant factor in investment decision making. If the employee is of
the young age than he can choose the long term investment plans, because there rests a long tenure
between his investment and realization of results (Taylor, 2017). He can also invest his funds in the
investments, which have higher return possibilities with higher risks as he can resist the market ups and
downs. The young investor can also make his investment portfolio effective as per the economy and
market. But the employee is of the old age, want the benefits in near future and they cannot invest their
money in long term plans. They couldn’t access the market movements and risk. So, they would want a
secure and protected outcomes from investment even if, the average of returns is lower (Samarkovski, et
al. 2017).
The financial status of an employee is also an important factor in investment decision making. The
employees, who are financially efficient, take higher risk to earn the high benefits. But the employees who
are just earning to fulfill their daily requirements are not able to make much experiment with their funds
and go for the secure benefit plans. They invest their funds to make their future secure, not to earn the
higher outcomes from their investments (Clark, et al. 2016).
Employee mobility or the frequently changing of jobs also turns out to be an influencing factor in
decision making. The employees who change their jobs frequently should opt for accumulation plans so
that the benefits from every employer get accumulated and it restricts the erosion of benefits. But it is not
possible in the Defined Benefit Plans where the frequent job changes lead to opening of new Defined
benefit plans. And this results into the erosion of the overall benefits of the single employee ( McIlroy,
2018).
The major factor which influences the investment decision is the relevant information of
investments. An employee who is well informed can make the better investment decisions. An investor
should be aware towards the information about all the factors which have an impact on the investment
returns. A well informed investor is better than an ill-informed because he can make better returns by

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taking less risks. Here the gender also arise a differences. The Research says that men are more congenial
to high risk as compared to women (McAllister, 2017). They are likely to engage in more risky investment
which provides the higher outcomes. Investment choice plans are riskier than the Defined benefit Plans as
there are more uncertainty and the risk factor is on high level. On the other hand the Defined Benefit Plans
are much more secure because there is less uncertainty in the benefits. Similarly the investment plans gave
better returns as compared to the Defined Benefit Plans because it varies with the market movements. A
hike in market movement gave a rise in the returns also. The market movements affect the returns
negatively and positively (Drew, Walk, and West, 2016).
Some of the employees choose the investment plans by comparing the past performances of the two. They
make an analysis of the past history of the plans and make a sound investment decision on the basis of
that. They compared the past performance of these plans for a certain time and assess their actual
outcomes. This is a comparison based assessment which helps the investor to choose the right plan. But
every investor does not have the same mind. An investor who has a sound knowledge of finance and
market conditions would always go for an investment choice plan over the Defined Benefit Plan (De
Zwaan, Brimble, and Stewart, 2015).
The tendency and personal interests of an individual also plays a vital role in the investment
decision. A person, who has keen interest in market fluctuations and the theories of variations in products,
will always choose an investment choice plan. On the other hand a person wants a secure return from his
funds and does not want to take high risks would go for the Defined Benefit Plans (Bianchi, et al. 2016).
EFFECT OF TIME VALUE OF MONEY, TAXES
The time value of money is a core concept of finance, which states that money available at the
present time is worth more than the same amount in the future. This is based on the potential earning
capacity. The principle argues money can earn interest and increase in value over time, therefore it has a
greater worth in the present. It means money which is lying idle or blocked is a waste asset. But if that
money is invested properly than it gives the returns in form of interest or profits, which increase its worth.
On the basis of the time value of money, the choice investment plan is a better option to invest because it
provides the earning returns in form of portfolio interest. At least the money is not lying idle as
accumulated funds. Whereas in the Defined benefit Plans a person contribute his funds for a specified

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future return. This amount of contribution has been decided after comparing various factors such as the
age of employee, his tenure of service, salary etc. The amount of contribution made under this plan has no
further earning as an interest or earning returns. So on the basis of the time value of money, the Defined
benefit plans has no further earning options after once contributing into the fund (Baldwin, 2016).
Taxes are the mandatory financial charge that is to be made to the government on any income or
gain. Taxes do not provide any return as they are the charge on our income without any return. An
investor should make the tax planning with the objective of minimizing the tax liability and maximizing
returns. Everyone should try to do tax planning to maximize his income by saving on taxes. In case of
Defined benefit Plans; the tax liability is raised only to the amount contributed to the funds because there
is no further earning on such amount. But in investment choice plan the earnings from investment are also
liable for the taxation and disclosure also. This may be the reason that the investor avoids to opt for an
investment choice plan (Clark, Fiaschetti, and Tufano, 2016).
RECOMMENDATION
Every employee who is looking for the investment options for investing his superannuation funds
to create value of them via Defined Benefit Plan or Investment Choice Plan should always consider the
concept of time value of money. It proves out as a remedy in risk erosion of value loss of money (Voit,
and Carson, 2014).
Before making any investments the employees should study the available investment options and should
choose the plans which have less risk with higher returns (Mazowita, and Greenland, 2016).
The tertiary sector employees should assess the performance of investment plans before investing
in both Defined Benefit plans and Investment Choice plans. They should make the investments as per their
interest and by keeping in their mind all the influencing factors of any investment (Wilson, 2016).

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CONCLUSION
Tertiary sector employees performs a major role in the economy and their rewards are solely
depends on their performances. So, to motivate them for better performance, several benefit plans apart
from the salaries are provided to them. They are free to choose the option for the investment of their
benefit plans. The investment of superannuation funds is a major decision which can be affected by
various factors. Out of which, some of the factors we have discussed above. Many changes and
improvements in such plans and schemes are being made from time to time for the betterment of the
employees and for easy operations.

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References
Baldwin, B., 2016. Municipal Employee Pension Plans in Canada: An Overview. Institute on Municipal
Finance and Governance.
Bianchi, R.J., Drew, M.E., Walk, A.N. and Wiafe, O.K., 2016. Fiduciary challenges in a low-return
world. Investment Magazine, (127), p.12.
Butler, D., 2016. Superannuation: Transferring foreign super fund amounts to an Australian
resident. Taxation in Australia, 50(8), p.481.
Clark, G.L., Fiaschetti, M.A.U.R.I.Z.I.O. and Tufano, P., 2016. Approaching Retirement: The Categories,
Timing and Correlates of Advice Seeking. Financial Decision Making and Retirement Security in an
Aging World, Wharton School, University of Pennsylvania, Philadelphia, 5.
De Zwaan, L., Brimble, M. and Stewart, J., 2015. Engagement with superannuation:'Is there really a
gender gap?'. JASSA, (4), p.12.
Drew, M.E., Walk, A.N. and West, J.M., 2016. Withdrawal capacity in the face of expected and
unexpected health and aged-care expenses during retirement. The Journal of Retirement, 3(3), p.77.
Evans, J. and Razeed, A., 2017. Adequacy of the Australian superannuation guarantee levy: A post-
retirement analysis. JASSA, (1/2), p.6.
Mazowita, B. and Greenland, J., 2016. Police resources in Canada, 2015. Juristat: Canadian Centre for
Justice Statistics, p.1.
McAllister, J., 2017. A national plan for closing the gender pay gap is overdue. Investment Magazine,
(140), p.24.
McIlroy, J., 2018. Will super fund Trump's infrastructure plan?. Green Left Weekly, (1171), p.2.
Samarkovski, L., Copp, R., Wiafe, O.K. and Freudenberg, B., 2017. The impact of tax on the prospects of
achieving target retirement wealth in Australian default superannuation plans.
Taylor, S., 2017. Could we nationalise the superannuation system even if we wanted to?. The
Conversation, November (121), p.2.

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Voit, K. and Carson, D., 2014. Post-retirement intentions of nurses and midwives living and working in
the Northern Territory of Australia. Rural and remote health, 14(2339).
Wilson, E.H., 2016. Employee pension plans. Law and Contemporary Problems, 15(3), pp.340-352.