Question

Defined Contribution Plans: All of the following are characteristics of this type of pension plan, except?      

1. Shift the investment risk to the employer: employee bears no risk for future growth
2. Shift the investment risk to the employee: employer bears no risk for future growth
3. Define the contributions to be made by the company
4. A 401(k) plan is a very common type of defined contribution plan  
5. Employer contribution is expensed as incurred

Defined Benefit Plans:  All of the following assumptions are used to determine future pension obligations of the company, except?

1. Interest rates
2. Employee turnover
3. Mortality rates
4. Other post-retirement benefits offered (life insurance, etc.)
5. Compensation

Answer 1

Defined Contribution Plan: The following is NOT a characteristic of this plan:

a. Shift the investment risk to the employer. The Employee bears no risk for future growth.

Note: A defnie contribution plan (like the 401k, is the kind of pension plan where the employees can make a voluntary contribution the plan from their pre-tax incoe. The employer may or may not contribute to the plan. If they intend to contribute, the have options to contirbute anywhere until to match the employee. Unlike a defined benefit plan, the employee is not guaranteed a certain benefit at maturity. The employee continues to bear the risk of not having a growth in the plan.

Defined Benefit Plans: The following is not considered for computing obligation

d. Other post-retirement benefits offered.

Note: The pension obligation is typically computed as final salary multiples by number of years of completed service with the company.