Factors To Consider When Choosing Superannuation Plan Essay.

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 Explain. (1500 words).

B. 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. (500 words).

The employees which are indulged in the practices of providing the services which are of the main employment area are known as the tertiary sector employees (Alajbeg, Bubas and Sonje, 2012). There are certain types of sectors like tertiary sector or the service sectors in which employees working in the organisations have to maintain their own superannuation funds because they do not work under any employer (Antolin, Payet and Yermo, 2010).

To maintain the superannuation funds in an appropriate manner there are two types of plans which could be adopted by the employees which will help in making the superannuation contributions more effective these two plans are defined benefit plans and investment choice plan. In relation with adopting the appropriate superannuation plan there are certain set of factors which should be taken into consideration. It is required that these two plans should be understood in a proper manner so as to make appropriate set of choice in relation with the same (Basu and Drew, 2010).

Defined Benefit Plan: It is a benefit plan in which the amount which will be received by the employees is being decided in the initial stage of the superannuation process (Blanchett, 2015). In this plan the requirements of the employees is being taken into consideration and the decision is made that the negotiated amount will be provided to the employee at the maturity of superannuation. Both employees as well as employers will have to make the definite contribution in the in the defined benefit plan.

Basis of the contributions are the salary of the employee, his age, his working tenure and the time for which the employee will continue to provide the services (Bodie, Kane and Marcus, 2011). Employer can use defined benefit plan as a tool for the increment of the salary of the employees. Evaluation of the final salary is being done with the help of defined benefit plan for the superannuation which helps in calculating the pension of the employees on behalf of certain important variables (Byrne et al., 2007).

Pensionable service is one of the aspects attached with defined benefit plans in which the numbers of years are being determined for which the pension will be paid to the employees.

Pensionable earning is another aspect which helps in determining the amount of salary that will be drawn by the employees after retirement of the maturity of superannuation (CHEN et al., 2013).

Accrual rate is also being attached with defined benefit plan which is a portion of the earning of the employee which will be received by him at the time when the selected scheme will end.

Investment Choice Plan

The superannuation plan in which individual investment accounts are being opened in relation with the investment purpose and amount of the investment which will be made by the employee could range according to the will of the same (E. M. Naresh Babu, 2011). It is the investment plan in which contribution made by the employee or the employer, any type of gain or the interest or the unit which is being earned during the plan period are to be paid by the employee as employer altogether in a single or multiple form. In this plan employees have the power so as to change their investment in any investment form.

Investment Choice Plan

Investment choice plan has one advantage in which employee has the power to manage the superannuation funds. It could also be said that in this plan employees has the freedom to make the choice of the funds in which he wants to invest (Park, Jeng and Tobing, 2016). Another benefit attached with the same is that employees of the tertiary sector have the freedom to make the portfolio of the investment or the assets in which they want to make the investment. Some of the strategies which could be adopted by the employees for the purpose of selecting the investment choice plan these strategies are secured funds, stable funds, trustee’s funds and fund shares (SIALM, STARKS and ZHANG, 2015).

Factors Which Should Be Taken Into Consideration While Choosing The Superannuation Plans

Risk Profiles: One of the major factors is the risks attached with the plan which an employee is planning to select (Yao and Lei, 2015). It is necessary that employees should understand that both superannuation funds and the contribution which are being made are different from each other. It could be evaluated that defined benefit plans are less risky than the investment choice plans. Link with the market is not there in defined benefit plan which makes it less risky investment. On the other hand investment choice plans are directly linked with the market and some of the investment plan which could be adopted is equity or the market linked plans (Denis Alajbeg, et. al., 2012).

Inflation Rate: The state at which the dearness of the cost living increases that particular stage is known as inflation rate. It is the aspect which helps in making appropriate decisions related with the superannuation. In relation with defined benefit plans an important role is being played by the inflation rates because it is a long term investment plan (Jefferson, 2012). Hence, it is required that the employees planning to invest in the defined benefit plans should take inflation rates under consideration.

Time Frame of Investment: It is necessary that the employees who are trying to invest in the superannuation should take the time frames of investments into consideration (Most, et. al., 2015). It is necessary that the employee who is planning to make the investment should decide the time frame that whether he wants to make the investment for the long period of time or want to make it for the short period. For the employees planning to invest in the investment choice plan should make the investment for the short period of time. On the other hand employees planning to invest in the defined benefit plan should make the investment for long period of time (Schreiber, 2016).

Financial Goals: Financial goals are the goals which differ from individual to individual depending upon the amount that is being invested by the same. For an individual or the tertiary employee the financial goal is to generate high level of profit and he is ready to take the high risk for the same then he should make the decision of investing in the investment choice plan. On the other hand if the same wants to gain less profit and is willing to gain the moderate pension with lesser risk then he should make the investment in defined benefit plan (Basu & Drew, 2010).

Factors Which Should Be Taken Into Consideration While Choosing The Superannuation Plans

Time Value Of Money And Issues Related With It

The concept of money which helps in providing the effective set of information related with the concept how and why the value of the money diminishes with the passage of time, such type of concept is known as time value of the money. It is the factor with the help of which superannuation contribution funds are being decided. To manage the time value of money both investment choice plan and the defined benefit plans have different set treatment as well as mitigation procedure (Alajbeg, Bubas and Sonje, 2012).

It is the concept that helps in evaluating the net present value of the superannuation contribution and the amount of pension that will be received at the maturity of the investment procedure. There are certain issues which are being faced by the employees which are issues with the real cash flow which are inflow as well as outflow of the cash and the desired amount are being considered in the time value of the money (Antolin, Payet and Yermo, 2010).

Recommendations

In relation with the information availed in above report related with the defined benefit plan and investment choice plan a conclusion could be made that the plan which is highly customised superannuation plan is investment choice plan. Investment choice plan provides the appropriate set of flexibility in terms of the designs and the development of the superannuation plan and the cash outflows which are related with the contributions and the cash inflow which are related with the pension amount (Basu and Drew, 2010).

It could be recommended that the investment choice plan should be selected because in defined benefit plan the future or the superannuation amount remains certain that is the amount of superannuation cannot be increased. But in investment choice plan employees or the investors have the freedom to make the modification in the investments plans and could ensure to increase the superannuation amount on the basis of the market situation (Blanchett, 2015).

Efficient Market Hypothesis

The market situation in which price of the commodity or the stock assets works as the reflection of all the information available about the business organisation is known as efficient market hypothesis (Bodie, Kane and Marcus, 2011). It is the situation in which determination of the price of the stock o the entity or the shares is being done in which information related with the company is being incorporated. It is being assured with the help of the efficient market hypothesis that the price of the stock assets should remain fair to assure that the fair values of the gain or loss should be provided to the investors. The statement that there are various factors that all comes together to make the price of the assets opposes the theory of efficient market hypothesis (Byrne et al., 2007).

Pension Fund Manager’s Role In Portfolio Management

In the portfolio management the fund manager has a very minimal role which does not have a much affect on the processes of the same. In the efficient market hypothesis no consideration of the past information is being made due to which help of pension fund manager is not being required in such type of market situations (CHEN et al., 2013). Investment choice plans are the plans in which pension fund manager needs to keep the updated track records of the portfolios of the employees so that better as well as effective direction could be provided to the same. Hence, it could be said that in the situation of efficient market hypothesis pension fund manager dos not play effective role on the other hand in the investment choice plan manager plays a vital role as he has to ensure that he should provide the updated portfolio plans to the employees who are willing to invest in the same (E. M. Naresh Babu, 2011).

Time Value Of Money And Issues Related With It

It could be analysed that there are certain set of factors which are required to be kept in mind before making the investment decisions or making the selection for the funds for the purpose of the superannuation contribution (Park, Jeng and Tobing, 2016).

As the market forces available in the market are very strong and the integration as well as interaction of such type of forces will have a direct impact on the shares or the assets so in such cases efficient market hypothesis cannot provide appropriate set of support. In relation with the efficient market hypothesis the suggestion could be made that in this market no investor will be able to gain higher profit than the other (SIALM, STARKS and ZHANG, 2015). This is the situation in which all the investors will be gaining equal amount of the profit from the investment hence in this situation no question to the pension fund manager to manage the portfolio will be required.

Hence, the conclusion could be made that the efficient market hypothesis are not useful in such case which could exist in market of the in relation with the investment decisions in the market because these hypothesis are vague and are not proved effectively (Yao and Lei, 2015).

References

Alajbeg, D., Bubas, Z. and Sonje, V. (2012). The efficient market hypothesis: problems with interpretations of empirical tests. Financial Theory and Practice, 36(1), pp.53-72.

Antolin, P., Payet, S. and Yermo, J. (2010). Assessing Default Investment Strategies in Defined Contribution Pension Plans. OECD Journal: Financial Market Trends, 2010(1), pp.87-115.

Basu, & Drew. (2010). The appropriateness of default investment options in defined contribution plans: Australian evidence. Pacific-Basin Finance Journal, vol 18, n0 3, pp 290-305.

Basu, A. and Drew, M. (2010). The appropriateness of default investment options in defined contribution plans: Australian evidence. Pacific-Basin Finance Journal, 18(3), pp.290-305.

Blanchett, D. (2015). Allocating to a Deferred Income Annuity in a Defined Contribution Plan. The Journal of Retirement, 2(4), pp.54-68.

Bodie, Z., Kane, A. and Marcus, A. (2011). Investments. 1st ed. New York: McGraw-Hill/Irwin.

Byrne, A., Blake, D., Cairns, A. and Dowd, K. (2007). Default Funds in U.K. Defined-Contribution Plans (corrected). Financial Analysts Journal, 63(4), pp.40-51.

CHEN, G., EBDON, C., KRIZ, K. and LAFORGE, O. (2013). The Management of Defined Contribution Pension Plans in Local Government. Public Budgeting & Finance, 33(3), pp.75-95.

Denis Alajbeg, Zoran Bubaš, & Velimir Šonje. (2012). The efficient market hypothesis: Problems with interpretations of empirical tests. Financial Theory and Practice, vol 36, no 1, pp 53-72.

19. M. Naresh Babu, E. (2011). Market Efficiency in Indian Cement Industry : An empirical study on Efficient Market Hypothesis.Indian Journal of Applied Research, 3(5), pp.18-19.

Jefferson, Therese. (2012). Private retirement savings in Australia: Current policy initiatives and gender equity implications.(Contributed Article)(Report). Australian Bulletin of Labour, vol 38, no 3, pp 234-250.

Most, W., & Wadia, Z. (2015). Longevity plans: An answer to the decline of the defined benefit plan. Benefits Law Journal, vol 28, no 1, p 23.

Park, D., Jeng, J. and Tobing, E. (2016). Retirement Savings and Gender under Identical Retirement Benefits. Global Economy and Finance Journal, 9(1), pp.27-37.

Schreiber, S. (2016). Defined benefit plan participants can receive lump sum and annuity under new rules. Journal of Accountancy, vol 222, no 6, p 68.

SIALM, C., STARKS, L. and ZHANG, H. (2015). Defined Contribution Pension Plans: Sticky or Discerning Money?. The Journal of Finance, 70(2), pp.805-838.

Yao, R. and Lei, S. (2015). Prior investment outcomes and stock investment in defined contribution plans. Applied Economics Letters, 23(14), pp.999-1002.