Factors that the employees should consider are the following:
Discuss about the Investment Choice Plan Or Defined Benefit Plan.
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).
Changing transfer values
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).
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.
Changing transfer values
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).
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.
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.
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).
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).
Will the DB scheme payout?
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).
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 not only depend on the formula, should consider other factors which can only be provided with the help of the professional advisors.
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 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).
Comparison on an annuity against the value
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.
References
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Feldman, D.C. and Beehr, T.A., 2011. A three-phase model of retirement decision making. American Psychologist, 66(3), p.193.
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