Question

Discussion

What type of retirement plan would you prefer and why (be specific), to Defined Benefit Plan or a Defined Contribution Plan?

would you select a company to work for depending on this criteria?

Why?

Discuss how buying an annuity compares buying buying a mutual fund.

Do you, as a buyer, have any control over the amount of investment risk to which you are exposed in aa annuity contract?

Answer 1

Different types of pensions plans

1.Defined benefit pension plan(DBPP)

Under DBPP ,the final pension is predefined based on the final salary and the period of service .Most of the pension plan offered by public sector enterprises and govt are of DBPP variety.This type ensure a predictable amount of pension to the employees for all the year after their retirement and it is guaranteed by state . DBPPs involve considerable cost to the employer. The firms with DBPP typically establish a legally separate trust fund, and the trustees invest employers’ contributions in shares and bonds

2.Defined contribution pension plan(DCPP)

Its more popular in US,do not guarantee the amount of final benefit which the employee will get after they retire .In DCPP, the employee and employer make a predetermined contribution each year, and these funds are invested over the period of time till the retirement of employee. Whatever the value of these investments at the time of retirement, the employee will get a certain amount which he would use to purchase an annuity. From the point of view of the employer, DCPP is also known as “money purchase pension plan”.

3.Pay as you go

In most European countries, including France and Germany, pensions are paid through PAYGPP, under which the current employees pay a percentage of their income to provide for the old, and, this, along with the contribution of the State, goes as a pension that sustains the older generation. In US, there has been a trend towards a decline in DBPPs and an increase in DCPPs.

Comment

Preference has to be given to defined benefit contribution plan ,as there are more growth chances of pension fund over the year.

No company should be selected based on work scope and interest basis ,not on the basis of which pension fund they are using for employees

2. Systematic Investment Plan (SIP)

Under a SIP, an investor can invest in the units of Mutual Funds at periodic intervals (monthly or quarterly) prevailing unit price of that time. This fund is for those investors who do not want to accumulate their savings and invest in one go. This fund permits them to accumulate their savings by directly investing in the mutual fund.

(ii) Feature: Investors can save a fixed amount of rupees every month or quarter, for the purchase of additional units.

No Choice of Securities :Investors cannot choose the securities which they want to invest in.