Defined Benefit Plan
Discuss about the Superannuation contributions in the Defined Benefit Plan.
The tertiary sector employees are the employees who engaged in the insurance, banking, education and health sector. There are various services that are provided by such employees. In this sector, people are working for fulfil the gap between the need of people and its fulfilment. It’s a lot of all kind of services that provides the social satisfaction. The employees working in such sector called as tertiary employees.
Along with the salaries, the employees of tertiary sector are in the motion to get some other benefits too. Superannuation contribution is an additional fund created for the future benefit of the employee. It is a fund created by the deposition of a certain amount by the employer. It is an option for the sustainable future of the employee. The amount contributed by the employer gets accumulated in this fund over the year and provide benefits in the future to the employee (Chenaghlou, Parizad, and Jafarabadi, 2017). It is a kind of pension plan. This is an additional benefit provided by the employer to employee which motivates the employees to perform better. It also provides the security to the future of employees. At the end of the employment, the employees get the benefits of the superannuation funds which make their future safe. There are various options available to the employees for the investment of their superannuation funds (Clark, Fiaschetti, and Tufano, 2017).
Defined benefit plan is an amount of fund which is promised to be paid to the employee at the end of his employment in form of pension or a lump sum amount of gratuity. It is created by the contribution of a certain amount made by the employer. Employees also can contribute an amount to the superannuation fund. This fund is known as Defined benefit Plan because it is an already known and defined plan for the benefits of employee. The amount of contribution to the fund is decided by the consideration of various factors. These factors are age of employee, service tenure, pay scale and the age of retirement etc. Theses all factors are considered for the calculation of the amount to be contributed to the superannuation fund. The contribution to this fund made by the employer periodically. A periodic review by the actuary is also held on the proportion of the contribution and on the rate of contribution. It is also observed by the actuary that the contribution made by the employer is in the benefit of the employee or not (Dean Lee, et al. , 2017).
Investment Choice Plan
Investment Choice Plan is an accumulation plan. In this investment plan the employer is only liable to pay a certain amount into the fund but is not obligated for any further action. In this plan the employees are under the right to earn an additional interest on their accumulated funds. The benefits under this plan is depends on the portfolio of the investment that is chosen by the employee (Kelbaliyev, et al. 2018).
To choose the option of investment of the superannuation fund is a significant financial decision on the part of employee. The plan contains high uncertainty and due to which the employee makes decisions on the basis of various parameters even when they are not related to the final outcome of the investment that they will be getting. Every plan has various merits and demerits, which are considered by the employee while taking the decision of investment. Also every employee has different aspect of thinking, which leads them to make an analysis on the basis of various factors which affects the possible outcome of an investment (Khodaei, 2017).
There are several factors which influence the decision making of investment. Out of them the age of employee is a significant factor. Younger employee has an opportunity to get the higher proportion of the benefits form investments. The time gap between the investment and realisation of funds is more in the case of young employees. Long term investment option also makes the portfolio of investment better for an investor as per the economy and market. On the other hand in case of old age employee, at the end of the employment the employees has no more ability to take risks, so they always go for the safe and secure benefit plans. They could not observe the daily market movements. So they want to invest in the protected and secure benefits even when the returns are lower.
Apart from the age of employee, the financial condition of the investor also plays a vital role in the investment decision. The employees who are financial efficient are eager to invest their funds in the highly risky investment options. But the employees who are just earning for fulfil their daily requirements are unable to take risks and try to go for protected and secure benefit plans. They prefer to invest in the Definite Benefit Plans (Stannard, 2017).
Employee mobility means the changing ability of the employees. It also turns out to an important factor in the investment decision making. The employee who tries to go for random changes in the jobs should opt for the investment choice plan due to the reason that this is an accumulation plan and the benefits of the employee from previous employer get transferred and accumulated with the benefits from the current employer. To mitigate the risk of erosion of benefits, the investment choice plan is a good option. Whereas in the Defined benefit Plan, Frequency in the changing of jobs results into the opening of different Defined benefits plan which contains a risk of erosion of benefits (Boston, and Prebble, 2018).
Factors Influencing The Investment Of Superannuation Contribution
The well informed investor has more chances to earn higher benefits on his investments. The information level of an employee also helps him a lot in choosing the better investment option for his superannuation funds. An employee, who is well informed with the situation of market and is known by the all related factor information, can avail high risk to earn more profit. It also differs with the gender of investor, as men are more favourable to the highly risky investments as compared to the women. They like to engage in the more risky plans to get higher benefits. Defined benefit plans are less risky in the comparison of investment choice plans. In an investment choice plan the investor needs to assess the entire option and to construct a portfolio of investments. Similarly the investment choice plan is less secure and protected as compared to the defined benefit plans, as there is huge uncertainty in the arising of the outcomes from such plans (Chenaghlou, Parizad, and Jafarabadi, 2017).
Many of the employees have a tendency to compare the two available options for investment on the basis of their past performances. It is a very popular and basic step taken by any investor in the way to choose the right investment option for their funds. As every employee has his own perspective, some do not believe on the data realised from the past comparison. The employees compare the past performance of any investment option for the time of last six months or for twelve months only, which do not reflects the exact position of the investment option. The employees who contain massive knowledge of finance show eagerness to choose investment choice plans (Clark, Fiaschetti,. and Tufano, 2017).
Along with all above mentioned factors, the personal interest of employee also has its impact on the investment decision making. Employees who are more interest in playing the market games and highly influenced by the market fluctuations, always choose the option of investment choice plan. These investors are more interested to make their investment portfolio balanced. On other hand the employees who want sustainability in the investment returns without taking more risks always sloping down towards the deferred benefit Plans (Chenaghlou, Parizad,. and Jafarabadi, 2017).
Time value of money is a concept which says that the present value of certain sum of money is more than the worth it will have in the future and this is happened due to the inflation and increased earning capacity of future. It means the money which is lying idle is an asset with no worth. But it can be invested properly to increase its worth and can earn the interest returns on it. If we apply the time value of money concept on the deferred benefit plan and investment choice plan, then the option of investment choice plan is the better one as it does not block the money but have an alternate use of the same accumulated amount in the form of portfolio interest returns. Whereas in the deferred benefit plans the contribution amount is calculated by considering various factors like age, service period and pay scale of the employee, which is equal to the amount of benefit accrued to the employee. So, according to time concept, the deferred benefit plan is not a good option as it has no further earnings on the contributed funds (Boston, and Prebble, 2018).
Tax imposition on any income or gain made by the employee, is the mandatory obligation, the payment for which has to be made by the employee to the government. This is an amount which is to be paid without expecting any return form it. In case of defined benefit plan, the tax liability is limited to the amount of contribution because there is no further earning has arisen on that amount. But in the investment choice plan the earnings on the investment is also liable to be taxed. The disclosure of such earning is also mandatory. This is the reason of avoidance of the investment choice plans by the investors (Biondi, and Sierra, 2017).
The employee, who is planning to make earn returns on his investments of the superannuation funds, needs to plan properly by considering all the related factors in his strategic planning. The time value of money concept should mainly be considered by the investor to get the effective returns on his investments. It helps them to mitigate the risk of value loss of money (Bikker, 2017).
The employees should make a proper comparison between available options for the investment of their superannuation funds to create a high value of their invested capital.
The tertiary employees should go for the plans which have less risk with higher profits. The risk and return factors are available in all investment plans. Before investing in any particular plan whether it is the investment choice plan or the defined benefit plan, the investor should assess the all risk and return factors consisting under the plans (Andréasson,. and Shevchenko, 2017).
The significant part of the economy has been held by the tertiary employees. Their performances decide the growth of such sector. So, to motivate the employees, the employer offers may other additional benefits to the employees along with their salaries. These additional benefits has to be provided by the employer to the employees to make their future secure. Superannuation fund investment decision is a significant process for the employee. The investment of their life time contribution highly affects their future security. Many impositions of policies and variations are made in these schemes and plans for the welfare of employees. So that employees can operate its investment functioning smoothly. Now, to get a conclusion of entire discussion it can be stated that before investing the superannuation funds, the investor should assess the all available options and the risk and return factors related to them to earn the better returns on the investment.
References
Andréasson, J.G. and Shevchenko, P.V., 2017. Assessment of Policy Changes to Means-Tested Age Pension Using the Expected Utility Model: Implication for Decisions in Retirement. Risks, 5(3), p.47.
Bikker, J.A., 2017. Is there an optimal pension fund size?: A scale-economy analysis of administrative and investment costs. In Pension Fund Economics and Finance (pp. 25-56). Routledge.
Biondi, Y. and Sierra, M., 2017. Pension management between financialization and intergenerational solidarity: a socio-economic analysis and a comprehensive model. Socio-Economic Review, p.mwx015.
Boston, J. and Prebble, R., 2018. The role and importance of long-term fiscal planning. Policy Quarterly, 9(4).
Chenaghlou, M., Parizad, R. and Jafarabadi, M.A., 2017. Risk Factors and Prevention of Pulmonary Embolism in Young Adults. Crescent Journal of Medical and Biological Sciences, 4(1), pp.7-12.
Clark, G.L., Fiaschetti, M. and Tufano, P., 2017. Advice in Defined Contribution Plans. Financial Decision Making and Retirement Security in an Aging World, p.96.
Dean Lee, M., Zikic, J., Noh, S.C. and Sargent, L., 2017. Human resource approaches to retirement: Gatekeeping, improvising, orchestrating, and partnering. Human Resource Management, 56(3), pp.455-477.
Kelbaliyev, G.I., Mammadova, G.M., Samadli, V.M., Talibov, N.H. and Samedov, M.M., 2018. Theoretical and Experimental Investigation on Granulation Processes of Powdered Materials in Cylindrical Granulator. J Chem Appl Chem Eng 2, 1, p.2
Khodaei, A., 2017. Provisional microgrid planning. IEEE Transactions on Smart Grid, 8(3), pp.1096-1104.
Stannard, J., 2017. Reshaping the default fund process. Superfunds Magazine, (423), p.10
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