Question

Bob's Burger Buns, Inc. is installing a brand new defined benefit pension plan. Bob is age 55 and will retire at age 65. The next oldest employee is age 35 and will retire in 30 years. Bob has a low risk tolerance. The average tenure of the rank-and-file employees is three years.

Examine each of the following portfolios and decide which of the three would be the best choice to fund the plan.

Justify your response in terms of the owner's risk tolerance level, inflation protection level, UBTI concerns, and compliance with ERISA diversification requirements:

Portfolio 1: 70% invested in U.S. government Treasury securities with various maturities; 20% invested in a municipal bond fund; and 10% invested in a money market fund invested un U.S> Treasury bills.

Portfolio 2: 40% invested in an aggressive growth mutual fund; 20% invested in certificates of deposit; 20% invested in financial futures; and 20% invested in a gold and other precious metals mutual fund.

Portfolio 3: 40% invested in a balanced stock mutual fund; 30% invested in a guaranteed income contract with a two-year guarantee; 20% invested in an income stock fund; and 10% invested in a money market fund.

Answer 1

considering all the above three portfolios with parameters on

• Risk tolerance
• Inflation protection level.
• UBTI
• ERISA

Portfolio A is the attractive option as Bob's has low risk tolerance level and should be inflation protected and also on tax benefits so portfolio A is the safest option as it has

• 70% invested in government treasury security which minimize default risk,it is backed by government trust and faith
• 20% invested in municipal bonds which gives tax benefits as it is tax free and also backed by govt trust so it fulfills UBTI norms.
• 10% money market treasury instruments these provide liquidity with govt trust

so keeping all the consideration's Portfolio A is attractive for Bob's