Chapter 22, Problem 6CP

Summary Introduction

To Discuss:

The correct answer from the given options which states that under the provisions of a typical corporate defined benefit pension plan, the employer is responsible for:

1. Paying benefits to retired employees
2. Investing in conservative fixed-income assets
3. Counseling employees in the selection of asset classes
4. Maintaining an actuarially determined, fully funded pension plan

Introduction:

Pension funds are of two types namely defined as contribution and defined benefit. Under defined contribution plan, the employers contribute a certain amount to the fund but the investment risk is borne entirely by the employees. Under defined benefit plan, the employer has the obligation to pay a specific annual retirement benefit and in any case if the performance of the investment is poor then the employers has to make arrangements to cover up the shortfall by contributing some additional assets to the fund.