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What do you think are the important factor that should be considered by tertiary sector employee when they are deciding whether to place their superannuation contribution in the Defined Benefit Plan or the or the investment choice Plan?

Superannuation contributions in Australia

The government has mandated it to make superannuation contribution for the employees because it has been clearly sensed that these kinds of opportunities help the employees to get involved in savings. The contributions made by the employees are further used by the finance managers of the organization or other finance industries to invest in portfolios (Berry, 2009). This investment will help the tertiary sector employees to earn returns on their savings. It should be noted by the employees at a proper analysis of all the environmental factors should be done before making any type of Investments. There are basically two types of plan in which the Australian tertiary sector employees can invest their money in, which are defined benefit plan and investment choice plan. (Boyd, 2013) Also, the type of plan which the employees are going to take-up should be assessed, after analysis of time value aspect of money and the risks that may prevail in these types of plans. These plans will help the employees to ensure that they are provided with sufficient returns on the savings which are being made in the form of superannuation contributions.

Superannuation contributions are a type of savings that have been made by the accumulation of small parts of the employee’s salary for years. In Australia, the government has made it mandatory for the employees to get encouraged in the superannuation contribution so that they can indulge in the habit of savings and also have a peaceful future after their retirement. In the year 2005, the contribution that was to be made as superannuation funds world amounted to be 3% of the total salary which was later increased to 9.5% of the salary in the year 2014 and is also said to become 12% by the year 2025. (Datar M. S., 2015) Superannuation contributions are also called salary sacrifice arrangements because of the voluntary contributions that are needed to be contributed to the superannuation contributions by them, which are a part of their salary.

The contributions that are made by the employees are used in the investment of different type of portfolios so that the time value of money can be achieved. (Datar S. , 2016)The main objective of the superannuation contribution is to make the employees indulged in the habit of savings so that they can make their future secure and live there life after retirement peacefully. There are many countries that have already made it mandatory for the organizations to collect superannuation contribution from its employees and then invest it into portfolios so that returns can be earned on them.

Defined Benefit Plan

The process of investing the superannuation funds has increased the job of The Financial Institutions. (Holtzman, 2013) Therefore the financial institutions have been assigned with a very important task of investing the money that has been saved by the employees in a very well known portfolio so that high returns can be provided to them at the time of their retirement.

There is basically three type of economic sectors in which an industry is divided- Primary secondary and tertiary sector. The main function of the tertiary sector employees is to use their skills and knowledge in order to make proper decisions and then help the firm to attain huge profits (Horngren, 2012). Hence it is very important for them to contribute towards the superannuation fund so that they can enjoy their savings after their retirement. A small rate of interest is collected as social security fund which is used for the betterment of society and making innovations in the superannuation process. (Knubley, 2010) Also, there have been many companies who perform the job of investment of superannuation funds in the eligible portfolios.

The defined benefit plan is the portfolio in which an employee can invest his collected fund if he wants a fixed amount of returns on the contributions, irrelevant of all the factors that may affect the investment (Kusano, 2018). The rate of return which the employee will be provided is stated at the very beginning of the period and thereafter no changes can be made to the return rate. The factors on which the rate of return is decided are mainly age of the employee, working tenure, average salary, faithfulness, etc. Hence this is a risk-free portfolio in which the employees can invest their superannuation funds if they want small returns. (Kuti, 2014)

The investment choice plan is a type of plan in which the power is being given to the employees so that he can choose the type of portfolio he wants to invest his savings in. The amount that is invested by the employee is returned to him with the returns after the deduction of the management and administrative expenses. The employees were having an appetite forest can invest in search schemes so that they can get higher Returns. (Lerner, 2009) A proper analysis and assessment of risk and return factors should be made before conducting any type of investment activity.

There are many factors that are needed to be assessed in order to make the decision on the type of plan in which the employee will invest his funds. There are a lot of differences between the investment choice plan and defined benefit plan that will help the employees to ascertain the time of portfolio in which he may want to invest his funds. The investment choice plan provides the consumers with a much higher rate of return as compared to the defined benefit plan. This is because of the versatility of the plan as it helps the employee to choose any type of portfolio in which he may want to invest his money (Lyon, 2010). Whereas, in the defined benefit plan a specified rate of return is ascertained at the time of making an investment which is very small as compared to the other plan. Therefore making it much more suitable for the employees to invest in the investments oil and if they are having proper skills and knowledge to study all the factors before making their investment.

Investment Choice Plan

The investment choice plan comes up with a lot of risks and misstatements that may end up with the losses of employees. (McLaney & Adril, 2016) It has been mentioned above that the customer who invests in the investment choice plan should have appetite forest and also he needs to have proper knowledge of the environment show that ascertainment of the portfolio can be done. In the case of defined benefit plan, the customers are not having any risks prevailing on them as the rate of return has been specified at the very time of making the investment. Therefore it will be considered that the customers who seek to uphold risks while making investments should invest their funds in the investment choice plan and the others should make their investment in defined benefit plans. (Noreen, 2015)

A lot of knowledge and analysis is required to make Investments in the investment choice plan as the employees are asked to choose the type of portfolios in which they want to invest their funds. No such analysis is required in the defined benefit plan as all the pain is suffered by the financial organization which is going to take the money for investment in return for a small rate of interest. (Piper, 2015) It can be also said that people can invest in the investment choice plan because they are already being provided with the salary that can be used to pay the expenses. Thus, the fund which is collected should be invested in a portfolio that will provide them with higher rate of returns and may improve their standard of living after retirement.

It is very important for the employees to understand the value of time in relation to money. It is known to each and every person that the value of money degrades with the passing time. So, it should be very important for the employees to invest their funds in activities which will help them to earn high rate of returns until the time of their retirement. The value of money is set to go down in the market if it is not invested in any kind of asset. The present market environment states the current value of money which may change in near future with the change in environment. Hence it is very important for the employees to take into consideration the fact that the value of money changes with the increase in time. Thus, the funds that have been collected by them as savings should be invested in some form of a portfolio.

Factors to consider in choosing between the two plans

The organization plays a very important role in making the value of investment high. They constantly make investments in the different type of portfolios using the superannuation fund of the employees and then return that funds to the employees at the time of their retirement. Therefore in order to increase the value of their savings, the employees should invest their funds in some kind of portfolio or allow the organizations to invest them so that they cannot be degraded with time.

There is a lot of confusion existing in the management of portfolios because of the dynamic nature of the environment. Hence the employees should try to take advice from the professional people so that the market may not overpower them and risk their savings. There have been many cases in which the employees have invested their money in perfectly stable portfolios but have incurred losses. There is being also cases in which unstable portfolios have provided high returns to the Employees. Therefore a proper analysis should be made before investing the superannuation fund in any kind of portfolio. It will be also a very intelligent opportunity to give the fund managers the task of investment of the superannuation funds because they have a lot of knowledge and analysis that can be used by them to choose the portfolio which will provide the highest return. The managers should keep the factors like the increment in taxes and other expenses in mind before making the choice of portfolios.

Conclusion

The money that has been collected by the employees of superannuation fund will only provide high rate of returns after investment if, proper analysis has been made to choose the type of portfolio in which investment is going to be made. Therefore, the priorities of the employees should be kept in mind while choosing the type of portfolio in which he will be investing the money. The time value concept of money should also be kept in mind because the value of money degrades with increasing time, thus leading to decrease the value of savings that are made by the employees. Also, the efficient market hypothesis has stated that the fund managers should choose the portfolio in which the investment is going to be made, only after deciding the number of losses and gains that may be returned to the employees on their value of an investment at the time of their retirement.

Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.

Boyd, W. K. (2013). Cost Accounting For Dummies. Hoboken: Wiley.

Datar, M. S. (2015). Cost accounting. Boston: Pearson.

Datar, S. (2016). Horngren's Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.

Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.

Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.

Knubley, R. (2010). Proposed Chnages to Lease Accounting. Journal of Property Investment & Finance .

Kusano, M. (2018). Effect of capitalizing operating leases on credit ratings. Journal of International Accounting, Auditing and Taxation .

Kuti, M. (2014). Crowdfunding: How to Fund Your Business Idea. Retrieved from www.business.gov.au: https://www.business.gov.au/info/run/finance-and-accounting/finance/crowdfunding-how-to-fund-your-business-idea

Lerner, J. J. (2009). Schaum's outline of principles of accounting. New York: Schaum.

Lyon, J. (2010). Accounting for Leases: Telling it how it is. Journal of Property Investment & Finance .

McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.

Noreen, E. (2015). The theory of constraints and its implications for management accounting. Great Barrington, MA: North River Press.

Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.

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My Assignment Help. (2020). Factors For Tertiary Sector Employees To Consider In Choosing Between Defined Benefit Plan And Investment Choice Plan For Superannuation Contribution Essay.. Retrieved from https://myassignmenthelp.com/free-samples/fin200-fundamentals-of-finance/defined-benefit.html.

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My Assignment Help (2020) Factors For Tertiary Sector Employees To Consider In Choosing Between Defined Benefit Plan And Investment Choice Plan For Superannuation Contribution Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/fin200-fundamentals-of-finance/defined-benefit.html
[Accessed 19 June 2024].

My Assignment Help. 'Factors For Tertiary Sector Employees To Consider In Choosing Between Defined Benefit Plan And Investment Choice Plan For Superannuation Contribution Essay.' (My Assignment Help, 2020) <https://myassignmenthelp.com/free-samples/fin200-fundamentals-of-finance/defined-benefit.html> accessed 19 June 2024.

My Assignment Help. Factors For Tertiary Sector Employees To Consider In Choosing Between Defined Benefit Plan And Investment Choice Plan For Superannuation Contribution Essay. [Internet]. My Assignment Help. 2020 [cited 19 June 2024]. Available from: https://myassignmenthelp.com/free-samples/fin200-fundamentals-of-finance/defined-benefit.html.

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