Superannuation Retirement Plan Samples for Students †MyAssignmenthelp

Questions: 1.What are the important factors that should be considered by tertiary sector employees when they are deciding whether to place their superannuation contributions in the Defined Benefit Plan or the Investment Choice Plan? What issues relating to the concept of the time value of money may be important in this decision-making process? 2.If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.Explain why this is not the case? Answers: 1. Superannuation is a type of retirement plan organised by a firm for its employees benefits and their future security. It is necessary for the employees to deposit part of their salary in the fund from their salaries so they can have a secure life after retirement. This plan is also supported by government through tax benefits (Mohan and Zhang, 2014). Superannuation funds are generally invested in two type of plans i.e. Defined Benefit Plan and Investment Choice Plan. Descriptions of both plans are given as below: Defined benefit plan Investment choice plan Definition Defined benefit plan states that an employer guarantees an employee to provide a specific retirement fund, lump sum on retirement which is fixed by a formula established by employees income history, in terms of service and age, instead of depending on investment returns of an individual (Merton, 2014). In investment choice plan employee can himself choose to invest in any plan having in an accrual from a choice of investment options (Brown and Weisbenner, 2014). Employees can also choose the option that provides a diversified mixture of investments or can be able to invest in a mix of single asset classes in which every alternative had different risks and expected return options and especially recommended time frames. Advantages In defined benefit plan there is less risk since the super is managed by the firm itself. No efforts are placed by employees in figuring out their retirement funds as the company is responsible for managing this (Slesnick and Suttle, 2015). One more benefit is that employees do not have to make a decision in contributing to the plan as the firm also does this for the employees and full paycheck is given to the employees. One major advantage is that an employee can invest the super wherever they want to invest; there is a multiplicity of options to choose for investment (Bodie, 2013). It is essential to be aware of that how and where the money is invested in reducing the level of risk. Another advantage of investment choice plan is that they are charged in a diverse method to other income by making diversification of investment. Disadvantages In this type of plan employees cant ask how the funds are invested as the decision are taken by the management (Paiella and Tiseno, 2014). One more drawback is that an employee exactly knows how much he is going to receive at the time he retires. It has inadequate potential. Reasonable rates are received on retirement, and it is more complicated to offer early retirement calculations. The risk level is high in investment choice plan. In this type of plan majority of the employees investments are protected for a time period. In case the employee is directly investing it might charge the excess cost to them. While selecting investment option, there are some essential things to keep in mind before taking a decision. The factors to be considered by tertiary sector employees for investment are as follows: Age factor: Age matters the most while choosing an investment choice. By considering this factor, senior employees can select defined benefit plan because it contains less risk on the other hand young employees can go for investment choice plan as to secure their future (Munnell, Aubry and Crawford, 2015). The age factor is important in investment because it will affect timeframe and it will have a major effect on investment mix to yield a good return. Risk bearing: At first employee has to assure that to what extent they are capable of tolerating risk. If an employee has less capacity to bear risk than defined benefit plan is a more appropriate option. It is because; this option contains less risk, and returns are guaranteed. On the other hand, if an employee is capable of bearing higher risk then they can go for investment choice plan (Slesnick and Suttle, 2015). There are various types of funds to invest in but choosing the best is most essential. The employee should select a fund which has done well for the previous 5 years along with considering current market trends and future opportunities. Investment return: It measures the profit and loss received while investing a fund. In defined benefit plan the returns are fixed, but in investment, choice plan returns depend upon how the money is invested, its timeframe and risk involvement (Mohan and Zhang, 2014). Thus, if employee desire fixed return then they should select defined benefit plan, but if they desire higher return by taking the risk then they should select investment choice plan. Investment need: Employee has to determine at initial stage that (how soon they need principal amount, and how long can they invest) however, before choosing an option employee has to assure that how much amount is required for an investment to reach the goal (Merton, 2014). In defined benefit plan the employee cannot invest his funds until he retires, but in investment choice plan they can invest the funds where they want. Retirement goals: Choosing the best superannuation fund will lead to secure retirement. Selecting the most appropriate plan will result in a beneficial retirement and the goals can be achieved through picking up the best among all option (Brown and Weisbenner, 2014). If the employees goals are fixed then they can go for defined benefit plan but if they want to achieve higher goals they can select investment choice plan. In the process of investment decision making the time value of money plays an important role. In the superannuation funds, the employees of the company frequently made contributions for the retirement plan (Dahlquist and Martinez, 2015). There are two retirement plans, and they have to choose one in between them. After making a choice, they have to consider an increase in the amount of investment through the interest earned. Instead of saving a dollar they have to invest that it leads to the higher amount in the future. The money invests, saves, or spends and even borrows by the employee instead of this the money taken by the employee as an opportunity cost in their account (Stalebrink, 2014). In many of the personal financial decision making this opportunity cost of time value exists. With their retirement plans, they are making a contribution to the little risks retirement plans or even no risk retirement plans. The superannuation account helps the employees to avoid the opportunit y cost and making the yearly contributions to it. In the future lack of money will be considered as opportunity cost the employee can earn expected return if they are ready to make a contribution in the plan then they can secure their future in advance. For example if an investment option provides $6,000,000 instantly at the time of retirement and other option provides $7,000,000 in 10 instalments of yearly basis then investor will tentative to prefer option 2 but this approach is not viable. It is because, both options are required to be discounted by considering PV factor to determine present worth of investment plan in order to make better decisions. In case let say discounting factor is 18% then worth of investment will be: Option 1 Option 2 $600,000*1 =$600,000 $70,000*(present value of annuity factor of 18% for 10 years) $700,000*4.3117 =$301819 This clearly shows that despite of lower amount option 1 has higher worth in comparison to option 2 thus investor must go with option 1 on the basis of its worth instead of face value. Analysis of present part shows that there is no perfection option for investment in retirement plans because the selection of plan is entirely based on required return and risk bearing capacity of the investor. For a selection of idol retirement plan, service sector employees are required to consider their financial goals and funds available with them for investment by considering the time value of money. 2. If the theory given by is true efficient-market hypothesis then the pension fund manager might as well make a selection of a portfolio with a pin. The efficient market hypothesis is a theory of investment which states that it is impractical to earn more profit than average Market return. It is because; the return provided by the company is similar to market performance (Garleanu and Pedersen, 2015). On the basis of this theory, the risk and the price of a share is based on available market information, and it will only alter if there is a change in position of market or company. This theory was given by Professor Eugene Fama, which states that the stock is always purchased and sold at their fair value because it is not possible for the investors to buy the stock at the low rate and sell it for the exaggerated price (Burton and Shah, 2017). It is impossible to break the whole market from authority stock selection, and then there is the only way for profit maximisation is to purchasing the risky shares to earn higher returns, but it is not possible with strategic investment strategy. The pension fund manager is answerable for the investment of the funds for which policy are formed by them by considering various portfolio activities (Guerard, Markowitz and Xu, 2015). Their role is to minimise the risk and maximise the return in order to provide maximum benefit to the pension fund holder. There is no implementation of the portfolio with the pin in the efficient market hypothesis which clearly shows that stipulated statement is not viable (Kevin, 2015). In accordance with the theory of EMH, the fund manager has the three important primary jobs to perform to earn high yield by bearing minimum risk. Description of these jobs is provided as follows: The first job which is carried out by the manager is to make sure that he makes the portfolio is well explained, and also it should be noted that for the diversification of company cannot be merely done by selecting a large number of stock. The second job of the manager is to provide assurance that the risk considered for the portfolio is as per risk bearing capacity of the investor. It must not be higher than that. Their third and foremost job is to make an alteration in the portfolio according to the management and clients requirement (Degutis and Novickyte, 2014). This alteration is done by because there is how many possibilities in making increase the return of the portfolio without increasing its risk. In this aspect, they are required to consider the tax benefits of investment to ensure higher returns with minimum tax obligations. References Bodie, Z., 2013. Investments. McGraw-Hill. Brown, J.R. and Weisbenner, S.J., 2014. Why do individuals choose defined contribution plans? Evidence from participants in a large public plan.Journal of Public Economics,116, pp.35-46. Burton, F.E.T. and Shah, S.N., 2017. Efficient Market Hypothesis. CMT Level I 2017: An Introduction to Technical Analysis. Dahlquist, M. and Martinez, J.V., 2015. Investor inattention: a hidden cost of choice in pension plans?. European Financial Management, 21(1), pp.1-19. Degutis, A. and Novickyte, L., 2014. The efficient market hypothesis: A critical review of literature and methodology. Ekonomika, 93(2), p.7. Garleanu, N.B. and Pedersen, L.H., 2015. Efficiently inefficient markets for assets and asset management (No. w21563). National Bureau of Economic Research. Guerard, J.B., Markowitz, H. and Xu, G., 2015. Earnings forecasting in a global stock selection model and efficient portfolio construction and management. International Journal of Forecasting, 31(2), pp.550-560. Kevin, S., 2015. Security analysis and portfolio management. PHI Learning Pvt. Ltd. Merton, R.C., 2014. The crisis in retirement planning. Harvard Business Review, 92(7/8), pp.43-50. Mohan, N. and Zhang, T., 2014. An analysis of risk-taking behaviour for public defined benefit pension plans. Journal of Banking Finance, 40, pp.403-419. Munnell, A.H., Aubry, J.P. and Crawford, C.V., 2015. Investment returns: Defined benefit vs. defined contribution plans. Issue In Brief, (15-21). Paiella, M. and Tiseno, A., 2014. Evaluating the impact on saving of tax-favored retirement plans. Journal of Pension Economics and Finance, 13(01), pp.62-87. Slesnick, T. and Suttle, J.C., 2015. IRAs, 401 (k) s Other Retirement Plans: Strategies for Taking Your Money Out. Nolo. Stalebrink, O.J., 2014. Public pension funds and assumed rates of return: An empirical examination of public sector defined benefit pension plans. The American Review of Public Administration, 44(1), pp.92-111.