Question

Respond to the following in a minimum of 175 words PLEASE TYPE RESPONSE:

What are some advantages and disadvantages of the defined benefits pension plan? The economy has shifted to workers changing jobs frequently which plan works better, support your answer with specific examples?

Answer 1

Advantages for Employees

• The employee would know its retirement amount in advance (from the day it signs the DBP contact).
• Benefits are indifferent to stock market risk/fluctuations or increase/decrease in bond yield.
• Comparing with DCP, the Defined Benefit Plan generates a higher return on investments which would include premature/ accidental death benefits to family members.

Advantages for Employers

• Due to the stable and risk-free nature of the Defined Benefit Plan, it leads to a higher workforce in the organization. This promotes loyalty and helps to retain valued staff
• As these funds are a collective investment and professionally managed, the savings generate higher returns with relatively less expense (cost of hiring portfolio manager, administration charges, etc).

Disadvantages of Defined Benefit Plans

• Employees would not have control on funds, i.e they would not know where their funds are invested as an investment decision and handling is done by experts.
• Employees exactly know how much they would get on retirement, they do not have the option to increase their retirement benefit.