Services are being provided by the employees working in the tertiary sector and the service sector. In tertiary as well as service sectors there are three types of sectors available in the same. Choice of the superannuation funds depends upon the will of the employees working in the tertiary sector because employers do not have any control over the decisions of the employees in relation with the superannuation funds (Bacon, 2010). There are two types of superannuation funds from which anyone could be chosen by the employees. These two types of superannuation plans are defined benefit plan and investment choice plan. While selecting the plan it is required that in depth knowledge regarding both the plans there are various set of factors which are required to be taken into consideration while selecting the superannuation fund. Hence, further information related with both the plans will help in making appropriate decisions regarding selection of the most effective superannuation fund (Aslan, 2015).
Defined Benefit Plan
Defined benefit plans are the plans in which the amount which will be received by the employee at the time of the maturity or retirement is being decided well in advance (Arnold, 2013). Defined benefit plan have low risk as it is not directly linked with the market. The amount is being decided on the basis of the requirement of the employee. Contribution of the amount investment is being made by both employers as well as employee as certain amount of the salary of the employee is being invested and rest is being invested by the employer. This contribution is being bifurcated on the basis of various factors like salary of the employee, number of year he has worked and the number of year he will provide the service (Ferson, 2012). Employers also use the defined benefit plan as the tool of increment. It is also termed as the final salary plan as the pension which will be received by the employee after the retirement is also being decided in the defined benefit plan (Nguyen, Nguyen and Yin, 2014). There are three variables which are attached with the defined benefit plan these are:
Defined benefit plan include pensionable services, it includes the number of years fir which the pension will paid to the employee
Pensionable earnings are another variable which represents the amount that will be drawn by the employees when he will retire.
Accrual Rate is the portion of the total amount which will be provided to the employee when the scheme will end (Paramasivan and Subramanian, 2009).
Formula for calculating defined benefit plan
No. of the year employee worked*salary of the employee at the time of retirement*accrual rate
There are certain set of factors which helps in deciding the pension funds these factors are the years for which the service is being provided by the tertiary sector employee, the number of years he will provide the services, his salary and the accrual rate of interest on which the decision will be made (Wang and Zhao, 2015). Defined benefit plan also provides certain set of benefits to the employees like a fixed and bulk amount is being received by the employees at the time of maturity. There are various other benefits also which are being provided to the employees when the investments are made by the employee. Several tax benefits are also being provided to the employees who make the investment in defined benefit plans (Babalos, Kostakis and Philippas, 2009).
Unfunded Benefit Plan
There are two types of defined benefit plans, funded and unfunded benefit plans (Darst, & Ebrary, 2013). Unfunded benefit plans are the plans in which investment in the assets is not be taken into consideration on the other hand investment done on assets and the stocks are being taken into consideration in the funded defined plan. One of the drawbacks attached with the funded benefit plan is that the certain amount is not being provided to the employee at the time of maturity because this set of amount cannot be estimated in the beginning of the investment (Jefferson, & Therese, 2012).
Investment Choice Plan
The investment choice plan is the plan in which all set of plans related with the superannuation can be processed with the help of the investment account for which is to be activated with the investment company. The amount with which the account will be activated depends upon the will of the employee (Most, & Wadia, 2015). In investment choice plans all set of earnings, gains and interests are being contributed together by the employer as well as employee. In this investment plan employee has the choice to make the modifications in the investment procedures as well as plans. It is the positive aspect which is being attached with the investment choice plan as employee has the decision making right in this plan. Another beneficial aspect is the employee has the choice to make the portfolio for the investment which is being made by him. Investment choice plan includes certain funds in which investment could be made these are secured funds, stable funds, trustee’s funds and share funds (Correia, 2015).
Factors that will help Tertiary Sector Employee in Decision Making
Risk Profile: Defined benefit plan has low risk involved in it as it is not directly linked with the market (Schreiber, 2016). Defined funds are safe to make the investment because any fluctuation in the market cannot impact the amount invested and the amount that will be availed at the time of maturity of the same. On the other hand investment choice plan has high risk involved with it as these are the funds which are directly attached with the market. Any fluctuation in the market has a direct impact on the investment choice plan as well as on the amount that will be received at the time of maturity (Basu, & Drew, 2010). As choice plan includes shares, trustee’s funds, etch which gets impacted with the fluctuation in the market and various activities of the market.
Inflation Rate: Inflation is the situation of the market in which the cost of dearness as well as living cost gets increased (Drakos and Konstantinou, 2012). Superannuation contributions should be taken into consideration while making any choice of the investment plans. Defined benefit plans gets proper support at the time of inflation because these are the long time period investment plans. In defined benefit plan the money is being invested for the long period of time die to which the value of the same declines with the passing time, due to this reason it is required that the more contribution should be provided by the employee if he decides to choose the defined benefit plan for investment purpose (Bai, Hsu and Krishnan, 2014).
Time Frame of Investment: Time for which the investment is being made should be taken into consideration by the employee who is planning to make the investments (Bacon, 2010). Time plays a very vital role in deciding the amount that will be received in return by the employee. Investment choice plans include short term investment plans so if employee is willing to invest the money for short period of time then he should choose investment choice plans on the other hand for long period investment plans defined benefit plans should be chosen by the employees.
Financial Goals: Financial goals are other important aspects that should be taken into consideration by the employees while making the investment decisions (Aslan, 2015). Different people have different set of financial goals. Like some people wants to generate the effective amount of profit from the investments then it is required that they should invest in investment choice plan. On the other hand if employees want to make the investment to secure their future and receive certain amount as the direct payment and certain as a pension after the retirement then they should invest in the defined benefit plan (Arnold, 2013).
Issues With Time Value For Money
It is required that the concept of time value for the money should be taken into consideration because it helps in developing the understanding with the fact that with the passage of time value for the money declines (Ferson, 2012). Different investment plans have different set of aspects; in the same manner both investment choice plan as well as defined benefit plans has different set of treatments as well as mitigation processes. Time value for money is the concept which helps in making the right choices as well as decisions in making the choice of investment. This also helps in providing the direction to analyze the pension of the employees which they will get at the time of retirement. Inflation and market conditions that play a vital role in time value for money (Nguyen, Nguyen and Yin, 2014).
Time value for money helps in calculating the net present value of the superannuation and the pension amount which is required to be paid to the employee at the time of maturity. Therefore the issue that occurs with such type of investments is maintaining the track record of the cash inflows as well as cash outflows. Maintaining such type of aspects in a proper way is one of the biggest issues faced by the employers (Paramasivan and Subramanian, 2009).
Efficient Market Hypothesis
Efficient market situation is the market situation in the commodity price as well as the price of the stock and assets works as the reflectors of the organization (Wang and Zhao, 2015). In other words it could be said that the efficient market situation is the situation in which the price of the commodity, price of the stocks of the organization as well as price of the assets helps in determining the actual position of the organization in the market. In this market situation the implication of the price of the asset as well s price of the stock is being done in a proper as well as fair way (Babalos, Kostakis and Philippas, 2009). This market situation is being opposed by the value of the assets and the price of various other things which keeps on changing depending upon the market conditions. In efficient market situation the stocks as well as shares of the organization are being purchased for the purpose of investment. While making the investment in this market situation the past information related with value of assets, and shares of the company is not being taken into consideration because decisions in this are made on the basis of present position of the company in market (Darst, & Ebrary, 2013).
Pension Fund Manager in Portfolio Management
Efficient market hypothesis is the situation in which pension fund manager does not plays a very vital role as all the aspects as well as decisions are dependent upon the current situation of the company hence decisions could be easily made by the individuals without taking help of the pension fund managers (Jefferson, & Therese, 2012). Track record of old date of the company is not required in this situation, in case if record were required to be tracked then only the help of fund manager was required in such type of market situation. In case efficient market situation occurs then the role of the pension fund manager will get hampered and it could also be possible that his role could get diluted in such type of market situation. Pension fund manager could provide their services in the investments such as investment choice plan because in these investment plans proper set of track record is being kept for the past activities of the company in the market in behalf of which investment decisions are being made by the individuals (Most, & Wadia, 2015). Hence, it could be analyzed that the pension fund manager does not play effective set of role in the efficient market hypothesis as the decision of the investment could be made on the current activities of the company in the market.
But in reality possibility of occurrence of such type of market situation are very minimal. Hence in such type of situations the individuals will have to take the help of pension fund managers to as to manage their portfolios (Schreiber, 2016). Pension fund manager also helps in making the decisions related with the investment plans and provides the information related with investment decisions that in which aspect the investment are required to be made and in which it not beneficial to invest the money. Hence, analyzing all the aspects it could be evaluated that in the efficient market hypothesis pension fund manager does not play effective set of role as investment decisions in such market are taken on the basis of the present situations rather than the situations which are based on the past aspects (Basu, & Drew, 2010).
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