Analysis of Investment Choice Plans for Tertiary Sector Employees

This report examines investment choice plans for tertiary sector employees, focusing on the factors influencing the selection between defined benefit plans and investment choice plans, particularly within the context of Australian superannuation. It explores the role of the tertiary sector, the service sector, and the various investment strategies available, including protected, stable, trustee's selection, and shares funds. The report also delves into the implications of time value of money in the decision-making process related to retirement plans, including factors such as after-tax spending needs, health history, existing investments, and other income sources. It highlights the significance of understanding present and future values when choosing a pension plan and discusses the impact of different retirement income sources like old age security and guaranteed income supplements. The conclusion emphasizes the importance of these factors in shaping the financial choices of tertiary sector employees in Australia.

REPORT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
FACTORS INFLUENCING FOR INVESTMENT CHOICE PLAN BY TERTIARY
SECTOR EMPLOYEE................................................................................................................1
ISSUES RELATED TO TIME VALUE AND MONEY FOR DECISION MAKING
PROCESS....................................................................................................................................3
CONCLUSION................................................................................................................................5
Reference.........................................................................................................................................6

INTRODUCTION
The assignment is based on the contribution of the tertiary sector employees in the
defined benefit plan or the investment choice plan and what are the issues related the various
concepts of tan and money when any of the decisions are being made. The all plans and concepts
are related to the pension or the retirement plan where company consider the several factors like
salary and the employment history to compute the benefits of plan to the employees. They have
the investment choice plans which also deal with the purpose of investment in terms of shares,
property, several deposits etc.
FACTORS INFLUENCING FOR INVESTMENT CHOICE PLAN BY TERTIARY SECTOR
EMPLOYEE
Tertiary sector is also known as the service sector which is the third economic sector after
the primary and the secondary. The service sector consists of the services not the end products.
Services are the intangible goods of the company which includes experiences, advice, access and
the discussion (Kelley.et.al.2013). The tertiary sector industry also includes the provision of
services to other businesses and to the final consumers. Services include the transportation,
distribution and sale of goods to the final consumers. The employees who are working in the
service sector of the economy are known as tertiary sector employees (Kadushin and Harkness,
2014). They are the employees who have to decide about choosing of either defined benefit plan
or the investment choice plan at the time of retirement or can be of the pension plan so that they
can survive beautifully in the future.
The focus is on the superannuation and cheering individual to invest in some of the plan
for their future benefit especially in their retirement times. The Australian government is very
proactive in these types of the activities. The government has made compulsory to contribute to
the retirement plans. There was introduction of the contribution of the employers contribution as
equal to the almost of the 8%of the employees’ salary. The employees are also obliged to give
the certain percentage of their salary towards the superannuation plan investment. Owning to
these superannuation plan and laws and increased realization by individual of the importance of
saving for the future and currently are billions of dollars are floating in the economy in the name
of the superannuation contribution (Mowday.et.al.2013). As of current data of Australia
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superannuation and mutual funds are one of the largest investors in Australia in the financial
market.
The defined benefit plan are the pension plans which states that it is the plan which is
sponsored by the employer where the benefit of the employee is calculated by using or
considering the factors related to the duration of the employment and the previous salary
structure. These plans are termed as defined in these employers and the employees know the
calculation of the retirement benefit beforehand (Schmoldt.et.al.2013). This fund is completely
different from all other pension plan because the payout amount is depending upon the
investment return and poor returns results in shortfall. It is the whole and sole responsibility of
the employers to make the investment plan by managing the other investment (Rosenbloom,
2014). There are some tax qualified benefit plans which give the employers the additional tax
benefit. The calculation of the defined benefit plan is done by formula. The formula takes into
consideration the benefit salary, the duration of the employees and the services. This states that
the employees do not get benefit from any of the portfolio and it the responsibility of the trustees
of the company to fund the prescribed plan in the company. The trustees who look after the
defined benefit plan have the good judgment to pay to the extra accumulated advantage on
annual basis.
The employee who opts for the investment choice plan, the account is flooded with the
individual superannuation contribution, employer sponsor contribution and it retains the
individual investment account (Pettigrew, 2014). In this plan employees have the liberty to
recommend, what type of assets are invested in the superannuation contribution. There are four
investment strategies in the investment choice plan, they are: protected fund- it the Australian
fixed interest securities, Stable fund- it is bond and the fixed interest securities with very small
exposure the parent country and the foreign country’s equity (Kotler, 2015). Trustee’s selection
fund – here funds are balanced in parent and the foreign shares investment. Shares fund-
individual investment is in parent and the foreign shares. These strategies can be differentiated
on the basis of their risk and the returns. Secure funds are less risky strategy to be followed out
of all. The company provides many invest products which are suitable to choose either from
defined benefit plan or from the investment choice plan.
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The options are as follows: Indexed pension: they provide the regular income which is
payable to us as long as we are alive and if we are not then it is transferred to our dependent.
Single life indexed pension: this provide to the employee the higher regular income, and are not
transferable to the dependent at the time of death. Allocated pension: regular income is provided
and uses the four available strategies if required and balance in this account is transferable to the
dependent at the time of death (Marglin, 2014). Roll – over option: it gives us the choice to
transfer our fund to an approved industry superannuation fund. Part-cash distribution: it gives us
the option to take out the certain amount of fund from the retirement fund in cash to be invested
for the individual consumption purpose.
The employees depending upon their situation can choose any of the retirement benefit
plan as they both are giving them what they are requiring but most of the tertiary sector
employees will use the investment choice plan as this have many combination available to us and
the fund is transferred to the dependent when the person is not alive. The above mentioned
investment plan are only factors which are affect the choice between defined benefit plan and the
investment choice plan (Benartzi and Thaler, 2013). The factors which affected were roll-over
option, allocated pension scheme, part cash distribution system and indexed pension scheme.
ISSUES RELATED TO TIME VALUE AND MONEY FOR DECISION MAKING PROCESS
The time value of money means the money available in the current time is more than the
equal sum in the future because of its earning capacity. This is the core principal of the finance,
which states that money is there to earn interest and the worth of the money is more as compared
to the received amount. It is also known as present discounted value (Ford and Richardson,
2013). It also allows the valuation if the income in the future in a way that annual income are
discounted and then added together, thus this gives the present value. And all the calculations are
thus derived from this present value method. Present value the current value of the future total
sum of money of cash flows at particular rate of return (Stiff.et.al.2014). Future value is the
value of an asset at the specific date in the future. There are five factors available in the
calculation of time value and money: there are: number of months and years included, annual
interest rate, present value, payments if any, future value. The concept of time value of money
can be applied to all the prescribed areas of the financial management and used to determine the
capital budget and valuation if stock and bond.
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Many companies and the accountants and the professionals in this field use this principle
of time value of money. Businesses can use this concept in several ways in making the decisions
daily (Lind.et.al.2013). This can be applied to evaluate the company option to receive and pay
money at different time. The main concept of the time value and money is that is the amount of
the dollar that we have today is more valuable than the amount if dollar we have in the future, as
we can get the interest today for the present value of dollar. When we talk in general, time value
of money is comparing the time frame to generate income from the options available for the
investment. The decision which offers the quick and more money is preferred. The defined
benefit plans which are sponsored by the employers are now becoming very old basically in the
private sector (Sialm.et.al.2015). The retiree of the private sector who still has the traditional
pension, they have the option of choosing any of the two, i.e., a life time stream of income and a
lump sum payment, which shows the present value of the income based on the factor which is
related to the time value of money.
Decision making is very crucial one, once made cannot be reverted back. The company
when working with the employees sees many factors and the consideration of it and there is very
careful analysis of the time value of money (Tanzi, 2014). The factors which are impacting the
decisions are: the after tax spending needs during retirement, the history of the family in terms of
health, the existing investment accounts and the investment plans, the other income sources like,
the other pensions, social security benefit, income generated from the full or part time
employment. The plans should not be shaky; if they are then the decisions would be tilted to the
decision of taking the lump-sum pension plan. Roll over to the IRA is the most attractive option
so far as because it does not carries the tax penalty if transferred from pension to the IRA. The
IRA offers the broad choice of investment (Heiss.et.al.2013). Choosing the lump sum does not
prevent any of the employees from electing the lifetime income option later. The time value of
money is very important to us as time is most useful asset to us and the value of money is
something that buys us the time and the available opportunity. It allows us to pursue the things
differently and are very meaningful to us. When the employees plan for the retirement, they deal
with how much to invest to support our retirement and the future.
There many common sources for the retirement income or can say the pension plans.
These are: Old age security; it the Australia’s largest pension plan program which provides the
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monthly pension starting from the age of 65. The next is guaranteed income supplements which
are an additional monthly benefit plan for the low income people or the pensioners. The
allowances are also there which provides the monthly benefit to the people with low income
between the age group of 60 to 65. It is basically available to the dependent or the spouses. When
we talk of the time value of money in choosing the pension plan, we will choose that plan which
will give us the full benefit of the investment and in return gives us the full value of money
(Hair.et.al.2015). The plan is chosen by looking at the present and the future value of the
investment and the pension. The time value of money is the basic assumption of the financial
market transaction. It refers to the present value of the future cash flows. Fair value is calculated
by taking into consideration the present value of cash flows and future value of present cash
which is available to us.
CONCLUSION
The assignment thus made on how and what are the factors that lead to choice of the
defined benefit plan and investment choice plan by the tertiary sector employees and what are
the factor that led to choice of the plan and how the time value of money has affected the
decision making process in selecting the pension plan in Australia. The employees of the service
sectors have chosen the investment choice plan as it is giving the more benefit to the employees
and there is the contribution by the employers also and the dependent are also getting benefitted
even after the death of the employee. The amount in the pension plan gets transferred to the
dependent or the spouse at the time of the death.
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