The Essay On Tertiary Sector Employees' Retirement Planning.

What is the defined benefit plan and investment choice plan?

Discuss About The Citation Classics Journal Of Business Ethics.

The assignment is based on the contribution of the tertiary sector employees in the defined benefit plan or the investment choice plan and what are the issues related the various concepts of tan and money when any of the decisions are being made. The all plans and concepts are related to the pension or the retirement plan where company consider the several factors like salary and the employment history to compute the benefits of plan to the employees. They have the investment choice plans which also deal with the purpose of investment in terms of shares, property, several deposits etc.

Tertiary sector is also known as the service sector which is the third economic sector after the primary and the secondary. The service sector consists of the services not the end products. Services are the intangible goods of the company which includes experiences, advice, access and the discussion (Kelley.et.al.2013). The tertiary sector industry also includes the provision of services to other businesses and to the final consumers. Services include the transportation, distribution and sale of goods to the final consumers. The employees who are working in the service sector of the economy are known as tertiary sector employees (Kadushin and Harkness, 2014). They are the employees who have to decide about choosing of either defined benefit plan or the investment choice plan at the time of retirement or can be of the pension plan so that they can survive beautifully in the future.

The focus is on the superannuation and cheering individual to invest in some of the plan for their future benefit especially in their retirement times. The Australian government is very proactive in these types of the activities. The government has made compulsory to contribute to the retirement plans. There was introduction of the contribution of the employers contribution as equal to the almost of the 8%of the employees’ salary. The employees are also obliged to give the certain percentage of their salary towards the superannuation plan investment. Owning to these superannuation plan and laws and increased realization by individual of the importance of saving for the future and currently are billions of dollars are floating in the economy in the name of the superannuation contribution (Mowday.et.al.2013). As of current data of Australia superannuation and mutual funds are one of the largest investors in Australia in the financial market.

Factors that impact the choice between defined benefit and investment choice plan

The defined benefit plan are the pension plans which states that it is the plan which is sponsored by the employer where the benefit of the employee is calculated by using or considering the factors related  to the duration of the employment and the previous salary structure. These plans are termed as defined in these employers and the employees know the calculation of the retirement benefit beforehand (Schmoldt.et.al.2013). This fund is completely different from all other pension plan because the payout amount is depending upon the investment return and poor returns results in shortfall. It is the whole and sole responsibility of the employers to make the investment plan by managing the other investment (Rosenbloom, 2014). There are some tax qualified benefit plans which give the employers the additional tax benefit. The calculation of the defined benefit plan is done by formula. The formula takes into consideration the benefit salary, the duration of the employees and the services. This states that the employees do not get benefit from any of the portfolio and it the responsibility of the trustees of the company to fund the prescribed plan in the company. The trustees who look after the defined benefit plan have the good judgment to pay to the extra accumulated advantage on annual basis.

The employee who opts for the investment choice plan, the account is flooded with the individual superannuation contribution, employer sponsor contribution and it retains the individual investment account (Pettigrew, 2014). In this plan employees have the liberty to recommend, what type of assets are invested in the superannuation contribution. There are four investment strategies in the investment choice plan, they are: protected fund- it the Australian fixed interest securities, Stable fund- it is bond and the fixed interest securities with very small exposure the parent country and the foreign country’s equity (Kotler, 2015). Trustee’s selection fund – here funds are balanced in parent and the foreign shares investment. Shares fund- individual investment is in parent and the foreign shares. These strategies can be differentiated on the basis of their risk and the returns. Secure funds are less risky strategy to be followed out of all. The company provides many invest products which are suitable to choose either from defined benefit plan or from the investment choice plan.

The options are as follows: Indexed pension: they provide the regular income which is payable to us as long as we are alive and if we are not then it is transferred to our dependent. Single life indexed pension: this provide to the employee the higher regular income, and are not transferable to the dependent at the time of death. Allocated pension: regular income is provided and uses the four available strategies if required and balance in this account is transferable to the dependent at the time of death (Marglin, 2014). Roll – over option: it gives us the choice to transfer our fund to an approved industry superannuation fund. Part-cash distribution: it gives us the option to take out the certain amount of fund from the retirement fund in cash to be invested for the individual consumption purpose.

Exploring different investment strategies in investment choice plan

The employees depending upon their situation can choose any of the retirement benefit plan as they both are giving them what they are requiring but most of the tertiary sector employees will use the investment choice plan as this have many combination available to us and the fund is transferred to the dependent when the person is not alive. The above mentioned investment plan are only factors which are affect the choice between defined benefit plan and the investment choice plan (Benartzi and Thaler, 2013). The factors which affected were roll-over option, allocated pension scheme, part cash distribution system and indexed pension scheme.

The time value of money means the money available in the current time is more than the equal sum in the future because of its earning capacity. This is the core principal of the finance, which states that money is there to earn interest and the worth of the money is more as compared to the received amount. It is also known as present discounted value (Ford and Richardson, 2013). It also allows the valuation if the income in the future in a way that annual income are discounted and then added together, thus this gives the present value. And all the calculations are thus derived from this present value method. Present value the current value of the future total sum of money of cash flows at particular rate of return (Stiff.et.al.2014). Future value is the value of an asset at the specific date in the future. There are five factors available in the calculation of time value and money: there are: number of months and years included, annual interest rate, present value, payments if any, future value. The concept of time value of money can be applied to all the prescribed areas of the financial management and used to determine the capital budget and valuation if stock and bond.

Many companies and the accountants and the professionals in this field use this principle of time value of money. Businesses can use this concept in several ways in making the decisions daily (Lind.et.al.2013). This can be applied to evaluate the company option to receive and pay money at different time. The main concept of the time value and money is that is the amount of the dollar that we have today is more valuable than the amount if dollar we have in the future, as we can get the interest today for the present value of dollar. When we talk in general, time value of money is comparing the time frame to generate income from the options available for the investment. The decision which offers the quick and more money is preferred. The defined benefit plans which are sponsored by the employers are now becoming very old basically in the private sector (Sialm.et.al.2015). The retiree of the private sector who still has the traditional pension, they have the option of choosing any of the two, i.e., a life time stream of income and a lump sum payment, which shows the present value of the income based on the factor which is related to the time value of money.

Options available in retirement benefits plan

Decision making is very crucial one, once made cannot be reverted back. The company when working with the employees sees many factors and the consideration of it and there is very careful analysis of the time value of money (Tanzi, 2014). The factors which are impacting the decisions are: the after tax spending needs during retirement, the history of the family in terms of health, the existing investment accounts and the investment plans, the other income sources like, the other pensions, social security benefit, income generated from the full or part time employment. The plans should not be shaky; if they are then the decisions would be tilted to the decision of taking the lump-sum pension plan. Roll over to the IRA is the most attractive option so far as because it does not carries the tax penalty if transferred from pension to the IRA. The IRA offers the broad choice of investment (Heiss.et.al.2013). Choosing the lump sum does not prevent any of the employees from electing the lifetime income option later. The time value of money is very important to us as time is most useful asset to us and the value of money is something that buys us the time and the available opportunity. It allows us to pursue the things differently and are very meaningful to us. When the employees plan for the retirement, they deal with how much to invest to support our retirement and the future.

There many common sources for the retirement income or can say the pension plans. These are: Old age security; it the Australia’s largest pension plan program which provides the monthly pension starting from the age of 65. The next is guaranteed income supplements which are an additional monthly benefit plan for the low income people or the pensioners. The allowances are also there which provides the monthly benefit to the people with low income between the age group of 60 to 65. It is basically available to the dependent or the spouses. When we talk of the time value of money in choosing the pension plan, we will choose that plan which will give us the full benefit of the investment and in return gives us the full value of money (Hair.et.al.2015). The plan is chosen by looking at the present and the future value of the investment and the pension. The time value of money is the basic assumption of the financial market transaction. It refers to the present value of the future cash flows. Fair value is calculated by taking into consideration the present value of cash flows and future value of present cash which is available to us.

Importance of time value of money in retirement planning

Conclusion

The assignment thus made on how and what are the factors that lead to choice of the defined benefit plan and investment choice plan by the tertiary sector employees and what are the factor that led to choice of the plan and how the time value of money has affected the decision making process in selecting the pension plan in Australia. The employees of the service sectors have chosen the investment choice plan as it is giving the more benefit to the employees and there is the contribution by the employers also and the dependent are also getting benefitted even after the death of the employee. The amount in the pension plan gets transferred to the dependent or the spouse at the time of the death.

Reference

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