The nature of pension plans with focus on defined contribution pension Research Paper

The nature of pension plans with focus on defined contribution pension plans and defined benefit pension plans - Research Paper Example â€Å"Actually, an individual who periodically invests in stocks, bonds, certificates of deposit (CDs), or other investments for the purpose of saving for retirement is establishing a personal pension fund. Often, such individual plans take the form of individual retirement accounts (IRAs) to take advantage of tax breaks offered by that arrangement† (Part A: The nature of Pension Plans n.d. p. 1010). Pension funds must be controlled. They have managerial responsibilities? create decisions on the subject of benefits and entitlements and, in some cases, guarantee that long-term duties are met in the circumstance of uncertainty and risk. As such, it is debatable that pension funds are like other financial organizations, which have objectives and goals in addition to procedures that help attain these objectives and goals are realized. Pension plans often increase productivity, decrease turnover, gratify union demands and permit employers to fight in the labor market. Corporations set up pension plans for various reasons. Sponsorship of such plans provides workers with an amount of security during the time of retirement and accomplishes a moral duty felt by many employers. This security also encourages the level of job satisfaction and possibly loyalty that might increase productivity and decrease turnover. Defined Contribution Plans: A defined-contribution plan is a kind of plan in which workers’ benefit for the period of retirement depends on the contributions made as well as the performance of the investment of the assets in his or her account, rather than on the workers’ years of service or history of earnings. Like a classic savings account, a defined-contribution account includes a particular balance at any given time, which is up to the market value of the assets gathered in the account. Unlike in the case of a defined-benefit plan, workers have significant control over how the donations and contributions to their plan are invested and ma y normally prefer an assortment of stocks (frequently including company stock), mutual funds, bonds, and other investment vehicles. These pension plans assure fixed yearly contributions to the pension fund (say, 5% of the workers pay). Employees prefer (from designated alternatives) where funds are invested generally? that is? in fixed-income or stocks securities. Retirement disburse depends on the volume of the fund available during retirement. In a defined contribution plan, investment rewards and investment risks are assumed by every worker or retiree and not by the employer or sponsor. This risk could be considerable. Based on simulations from safety returns over the 20th century across 16 states, there can be seen substantial variation in pension fund ratios across both the country as well as different time periods in the same country. â€Å"There are several types of defined contribution plans, including money purchase plans, profit-sharing plans, 401(k) arrangements, savings plans, and employee stock ownership plans (ESOPs). These are described briefly below† (Defined Benefits and Defined Contribution Plans: Understanding the Differences, n.d. p. 2). Advantages: Observe money and develop