FIN200: Analysis of Defined Benefit and Investment Choice Plans

This report provides a comprehensive analysis of retirement planning, focusing on defined benefit and investment choice plans. It examines the key differences between these plans, including contribution structures, risk profiles, and potential benefits for employees. The study delves into the importance of time value of money, risk capacity, and the impact of inflation and taxes on superannuation funds. It also explores strategies for risk mitigation, diversification, and tax optimization within the context of retirement planning. Furthermore, the report compares superannuation funds in Australia and India, highlighting key differences in plan structures and employee choice. The analysis aims to assist employees in making informed decisions about their retirement plans and maximizing their long-term financial security.

FIN200 Assignment T1, 2018

TABLE OF CONTENTS
Defined Benefit Plan..............................................................................................................3
Investment choice plan...........................................................................................................4
Risk capacity..........................................................................................................................5
Other related issues associated with investment decision......................................................5
Time value of money.............................................................................................................5
Planning..................................................................................................................................5
Risk Mitigation.......................................................................................................................6
Inflation..................................................................................................................................6
Diversification........................................................................................................................6
Tax..........................................................................................................................................6
References..................................................................................................................................8

The present study evaluates and analyses Defined Benefit and Investment Choice plan, for
assisting the employees in choosing the best suitable plan as per their need. It is totally based
on the employee, whether they want to either choose Defined Benefit or Investment Choice
plan; however the study makes it simple for the employees in getting a better understanding
of both these plans. Along with this, the study also assesses the impact of the time value of
money and taxes on the superannuation funds.
Retirement planning for placement of superannuation contributions
Retirement planning means the assigning of savings for retirement phase. The objective of
retirement planning is to accomplish financial targets and independence. It is a process of
managing and planning employee’s both short-term as well as long-term funds to aid them in
achieving their financial targets in working years as well as on retirement (Thorp and et al.,
2017). It is engaged in analysing employee’s financial goals, existing financial position and
potential cash flow in order to develop a detailed retirement insight and roadmap.
In addition to this, a retirement plan possesses several benefits for the employee; this enables
the employee to make an investment in their financial security when they reach the stage of
retirement. For bonus points, employees are also entitled to considerable tax benefits and
other incentives.
The employee gets multiple benefits from retirement planning, wherein the contributions
made by an employee can make a reduction in existing taxable income, plus these
contributions and return on investment are not entitled to tax unless and until these are
distributed. Along with this, contributions are facilitated to make payroll deduction and
compounding interest over the period of time, and it enables little regular supply of
contributions to developing a considerable retirement savings (Donald and Le Mire, 2016).
By this retirement assets can be conducted by an employer to other, plus there is the higher
accessibility of saver’s credit. Furthermore, the employee has a great platform to make
improvement financial security during retirement.
Options for placement of superannuation contributions
There are two types of retirement plans which can be selected by tertiary sector employees
for their retirement planning which are defined benefit plan and investment choice plan. The
description of same is provided as below:
Defined Benefit Plan
A defined benefit plan fixes the benefit of an employee in advance, generally as a percentage
of the earnings of an employee at their retirement. For example, a defined benefit plan, as per

assumption provides a retirement allowance of 1 % of the total earnings per year. When the
employee is at the retirement stage after 40 years, then the employee will get an allowance of
40% of their earnings on the pre-retirement basis. In the defined benefit plan, the employee
cannot know how overall plan will cost; also there is the difference in contribution rates,
based on the results of the standard reviews (Peng, 2017). Further, the employees can forecast
the overall benefits which they get as the percentage of their earnings before the stage of
retirement. In the DB plan, the higher the return on investment is, the lower will be the rate of
contribution. However, in case the investments are not effective, then the contribution rates
are required to be increased to offer the promised benefits. The overall cost of purchasing a
retirement pension can also impact the contribution rate.
Investment choice plan
An investment choice plan possesses a set contribution plan for the employee as well as the
employer. For instance, in most of the investment choice plan, both employer and employer
will make a contribution of 5% of the total earnings of employee, or total of 10%. Further,
these contributions are put into investment purposes for the support of every member
engaged in the plan. The benefits of retirement for the employee will be based on the total
deposits of money by retirement, and it is impossible to know the pension benefits in advance
(Cummings, 2016). Further, investment choice plans are comparatively immature that is they
have faced comparatively a low amount of retirement, several issues and might take place in
due course. On the other hand, the main factor is the sufficiency of payment of pension
benefit on retirement in the investment choice.
A factor to be considered for selection of Options for placement of superannuation
contributions:
Compound interest: turning out to be a good saver is the core element of gaining success on a
retirement plan. Through constant contributions in the retirement plan sponsored by employer
and IRA, the employee is able to maximize compound interest power, in which the interest is
gained on the first principle as well as on accumulated interest on earlier dates (Gerrans and
et al., 2016). With ongoing contributions, employee retirement savings have a higher
possibility of accumulating to satisfy long-term financial goals.
Personal Savings: By taking the impacts of inflation into account, there are higher chances
that employee’s retirement plan return might shortfall the needs, particularly long duration
retirement. Generally, social security offers a better base for planning retirement (Cheah and
et al., 2015). Therefore, in order to prevent a possible shortfall, it is essential for the

employee to do strategic planning for supplementing their retirement income with individual
deposits and savings.
While interpreting these standards there is no assurance of future success; employees can get
the chance to choose the appropriate roadmap (Kireeva, 2016). The earlier the employees
realize the impacts of economic factors, the sooner they will be able to implement strategies
that can assist them in achieving their financial retirement objectives. In the present era,
employees are required to become proactive to increase their retirement planning for future.
Risk capacity
For the employees, having less or no capacity to bear risk or their financial status reflects that
they are not in a position to bear the risk, then they must select defined benefit plan due to
comparatively low risk (Grable and Carr, 2014). On the other hand, if the employee risk-
bearing capacity is high and their financial status reflects that they are in a position to bear
the risk, then they can undoubtedly choose investment choice plan.
Other related issues associated with an investment decision
Time value of money
Core theory of finance is based on time value which means that money which exists at the
present time has more value than the same in future. Potential earning capacity is the base of
same. The worth of money can be increased as interest can be earned over time, but it has
more of its value in the present (Xingyun, 2015). It is considered useful financially for having
some amount of money and expend it directly the reason behind this is an increase in
inflation rate can decrease the purchasing power of the same amount. It is applicable to all
parts of financial management can be utilized at the time of capital budgeting. It’s a crucial
element of capital budgeting and net present value approach as it offers an accurate picture of
benefits and returns to the financial managers that they resolve on capital projects and
investment prospects.
Planning
Planning for retirement is lifespan process. It is the duty of employees to make sure that
retirement portfolio earns from the investment which makes them happy (FroidevauxS,
Hirschi and Wang, 2016). It further specified that the employee need is to continue abreast of
trends; tips and long-term investment choices which help them in reaching their financial
objectives.

Risk Mitigation
Target retirement funds are one of the best alternatives since they involuntarily change risk
based on age and relative distance to retirement age (Muratore and Earl, 2015). To set up
employer-sponsored plan employees frequently utilize risk assessment tool, but it is
unsuccessful in retaining these settings. It creates risk mutually in account rebalancing and
also in age-risk correlation.
Inflation
1% increases in inflation hardly close an eye in one year. If it does not stop for another 20
years, then our purchasing power which was planned, i.e. $60000 will fall to $49000. It is
assumed that inflation rate should not be rise from more than 1%. It is important to save after
taking this into concern. The employee must be aware of the fact that, inflation ever time can
flush the savings (Merton, 2014). However, most of the individuals do not recognize the
possibility serious impacts of inflation. For example, if the inflation is at 3%, means $100
dollar at present will be valued at just $67.30 after 20 years. In this situation, a total of 1/3rd
loss will be faced in value. At the age of 35, further, the amount would be declined to $34.44.
Thus, it is significant to ask for retirement savings advice and measures that can assist in
preventing inflation threat.
Diversification
Usually, people forget diversification which results in additional risk to their
investments. Titman, Keown and Martin, (2017) asserted that in the opinion of many people
that they are diversified since they have invested their money in mutual funds, but the reality
is that they are investing in particular asset class: equities. If one has to get true
diversification it can be done only with the help of self-directed IRA, it regulates investments
in various assets, for example; real estate or private lending.
Tax
Present income level, tax bracket, and the types of tax-deferred retirement savings plans of an
employee has a significant part in how much money employee can save for employees
retirement (Brown, Cederburg and O’Doherty, 2017). By maximizing your pre-tax
contributions to employer-sponsored plans and Individual Retirement Accounts (IRAs), the
employee can take advantage of the deferred benefits of such plans .Contributions of
superannuation funds can be classified into two categories in terms of taxes:
Tax-deductible: Tax of at least 15% will be reduced from the contributions made by
employees as it takes entry in fund; these are also called concessional contributions.

Non-tax-deductible: on the contributed super the tax will not be deducted when it enters the
fund, within the particular limits. It is also called non-concessional contributions.
Comparison of superannuation funds in Australia and India
Australian Superannuation means the arrangements placed by the Australian government to
help individuals in Australia to amass money for retirement income. Superannuation funds
within Australia are considered as partly mandatory and are motivated by tax
benefits(Hutcheson and Newell, 2018). The government of Australia has set minimum
standards on the contributions made by employees and the superannuation funds
management. It is mandatory for the employers to contribute towards superannuation for their
employees over the wages and salaries of employees,
Superannuation benefit is referred as a retirement benefit given to the employee and offered
by the employer. In short, superannuation benefit means the pension plan carried out by the
employer for their employees, wherein some amount is contributed by the employer to a
superannuation group for the investment and retirement purpose (Edmonds, Holle and
Hartanti, 2015). Further, employees began to receive a pension based on the plan type which
the employer has selected at contribution stage, also the choice that employer might practice
at retirement stage.
On the other hand, Superannuation funds in India are pre-set and fixed by company or
employer, employees have no power to choose their own plan type and make decisions on the
same (Goel and Mani, 2018). From scheme to benefits everything is set by the company, and
guidelines are provided to employees to provide them a better understanding of the overall
retirement plan.
Based on above investigation, it can be concluded that tertiary employees can make use of the
combination of both defined benefit plan and investment choice plan in order to offset the
retirement portfolio in an effective manner to ensure diversification. The mixture of these
plans can help in securing their lifetime savings, while contribution in superannuation funds
will make sure that their financial targets are met. Thus, the employee will be benefited with
these investments by higher income and returns, by which employees can enjoy the benefits
and turning the investment into worthwhile.

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