Answer:
The Superannuation contribution is meant for retirement planning and security. The contributions are done by the employee and employer towards a fund known as superannuation and help the employee post their retirement. The deduction of the contribution majorly happens from the salary and plays a vital role in reducing the tax liability. The contribution of the employer happens from the funds of the company. With the due passage of time, there has been a significant increment in the superannuation funds because post-retirement sufficient funds are needed to support the means and standard of living.
The contribution in the superannuation can be done through defined benefit plan or Investment choice plan. However, the selection rests on various factors. The process and mechanism of superannuation play a vital role in enhancing the level of savings and post-retirement availability of funds can be ensured (Kollmorgen, 2015).
When the option of Defined Benefit is taken into consideration then the scheme leads to huge benefits and in this scenario the benefits are limited. However, the level of risk is less in this scheme. The return is dedicated and ensured. On the other hand, the Investment Choice plan is riskier in nature and feasible for the employee who has a higher risk appetite. In this scenario, the returns can be more that that is expected but is exposed to many variations and risk. It is suitable for an employee who has a higher risk preference and has other classes of assets (Petty et. al, 2012). Hence, it is simple that the investors or employees with a higher risk capacity must go for Investment Choice Plan and the one with conservative bent of mind must opt for Defined Benefit Plan.
Moreover, the benefit that is derived by both the scheme prevails upon the mind of the employee when a selection needs to be done among the two. When it comes to the defined Plan the employer provides a certain percentage of contribution along with the employee deduction from the salary. In this scenario, the computation happens by dint of the service to be provided along with the salary drawn. However, if the fund appears to have a lower figure then the responsibility falls on the managers of the fund. In the case of any deficiency, the funding needs to be done to eliminate the gap (Power, 2017). On the other hand, when it comes to the investment choice plan the employees have the power to make their own selection and pick the portfolio as per their requirement (Porter & Norton, 2014). In the case of transfer of or switch of plans then the employer's role is discharged after a certain amount is paid towards the contribution.
In the case of Defined Benefit Plan, the employees undergo the concept of risk and have to bear the risk if the fund does not provide the desired return. Under the Defined Benefit Plan, the risk is more for the employee as the returns may not be sufficient from the investment. On the other hand, in the case of an Investment Choice plan, the employer if free from the obligation and employees are subject to the risk that is prevalent in the market.
The selection of the fund is highly influenced by the future terms and conditions. The post life retirement plays a vital role in the fund selection. Basically, the primary goal of the superannuation fund so to have a major support to the employee's post-retirement. the employee might be having more than a source of funds and in this scenario, the employee might be ready to take risks (Parrino et. al, 2012). When diversification is done, the employee gets a lease to vouch for higher returns. On the other hand, when the employee has only a single source of income or asset class then the employee selects the Defined Investment plan as it leads to the regular source of income that is not subjected to risks.
It needs to be noted that the selection of any fund or investment is influenced by the time value of money. When it comes to the process of decision-making, the time value comes into action. The funds perform in a strong manner and generate return when the time span is greater. Higher the time factor, the more will be the return. When the time value is less, it generates lower income or return (Marsh, 2009). Hence, it is of a major concern that the investors must understand the concept because the performance of the funds leads to a better result.
Efficient Market Hypothesis
The Efficient market hypothesis articulates the view that the stock price in the market operates with absorbing all the necessary information prevalent in the market and that the information automatically attaches to it. Moreover, the theory is the fact that the market can vary at any point of time and hence it is difficult for the investors to judge the market. In short, no investors can sell the stock at an abnormal gain and purchase at the lowest price. Therefore, it is difficult to beat the market. The stock can be purchased at their fair prices and stops the investors from making a windfall profit (Melville, 2013). Therefore, it is desirable that the stocks should never be considered or selected with the help of a pin because the market is always uncertain in nature and might take a different stand. Hence, it is advisable the fund manager should look into the prospect and invest by taking the concept of diversification (Needles & Powers, 2013). No single stock or industry should be selected while building a portfolio rather different stock and industries must be comprised of the portfolio. Selection with the help of a pin might provide stocks but is exposed to huge frailties and might end in huge losses. Therefore, it is advisable that the selection must be done in a diversified mode so that an expectation of higher return can be derived.
References
Kollmorgen , A 2015, Superannuation fund performance and fees, viewed 21 May 2017 https://www.choice.com.au/money/financial-planning-and-investing/superannuation/articles/superannuation-funds-performance-and-fees-191115
Marsh, C 2009, Mastering financial management, Harlow: Financial Times Prentice Hall.
Melville, A 2013, International Financial Reporting – A Practical Guide, 4th edition, Pearson, Education Limited, UK
Needles, B.E & Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. & Bates, T 2012, Fundamentals of corporate finance, Hoboken,
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M & Nguyen, H., 2012, Financial Management: Principles and Applications, 6th ed., Australia: Pearson Education Australia.
Porter, G & Norton, C 2014, Financial Accounting: The Impact on Decision Maker, Texas: Cengage Learning
Power, T 2017, Fund choice: Comparing super funds in 8 steps, viewed 21 May 2017 https://www.superguide.com.au/boost-your-superannuation/comparing-super-funds-in-8-steps
