Discuss about the Benefit Plan of the Tertiary Employees.
Employees in different sectors have one thing in common that is their concern for the future security in terms of money. Each employee is concerned about his savings for the future. After the retirement every employee wants a continuous income for the rest of their life to live a prosperous life. This concern of employee make them to invest a part of their earnings in some investment plans in order to get a good return at the end of investment period. Such services of decision making for the right choice of investment plan for the customers is provides by the employees of financial industry. These tertiary employees working in financial industry examine the exact situation of individual’s financial assets and liabilities. After that they compare different plans according to their customer’s suitability and suggest the best investment plan to invest. This report is made to help thee tertiary employees to understand definition defined benefit plan and investment choice plan, also includes a comparative analysis of different issues influencing the decision making for the selection of best investment plan related to tame value of the money and tax.
Systematic investment plan is a scheme developed by the employer or an organization, which is to be selected by the individual to make his investment for future savings. For the convenience of employees or individuals there are many investment plans in the market. These investment plans mainly categorised into two types as Defined Benefit Plans and Investment Choice Plans. Employees have to select one or more plan depending on their financial assets, liabilities, and suitability for the plan (Choi, et al. 2012).
Third sector of any economy consists of the production of services in place of an end product and employees working in this sector are known as tertiary employees. This sector mainly divided into two categories as one is businesses making money and another one comprise non-profitable businesses. Employees working in business of making money mostly deal with the financial services to their customers. Decision making for the right selection of investment plan is their task. Employees approach for the same and they need to be understood of the essential knowledge about the investment planning. Investors have to consider different factors while selecting the best plan for their customer. Tertiary employees relay on investment plans for their future need of the money as they provide only services which makes them unemployed after the completion of their service period. Therefore they reach out to make a better investment of their money to get a good return at the end of investment period (Johansson, 2009).
Defined benefit plan is also called a pension plan. This plan is an employer-sponsored retirement plan designed by the employer for his employees. In this plan the future benefits of the plan are computed using a specific formula which considers various factors like service period of employee and salary paid. Employer itself designs the portfolio of management for the investment plan and investment risks for the plan. In this plan there are several restrictions for the employees like when and what methods are to be provided to the employees for the withdrawal of their investment return without penalties (Larcker, 2013).
In this plan employer cut a definite amount or a percentage amount from the salary of their employees as an investment of the plan. In this plan employees get to know their benefits of the plan in advance by using a formula developed for the computation of benefits prior to make any investment in such investment plans. This plan is quite different from other choice plans as the final return benefits depend on the investments made in the plan irrespective of the market scenario. In other words, investment made in the plan is the only factors influencing the amount of benefits irrespective to the market risks. Employers decide a specific amount or percentage of the employee’s basic salary as an investment in this plan. They deduct this amount from their salary at the time of paying their salary every month. At the end of investment plan withdrawal of the returns are to be made in predefined manner decided by the employer. This withdrawal or returns may be paid in monthly payments throughout the life time or as a one-time payment (Ergun, et al. , 2016).
Organizations make defined benefit plans for the employees working in the organization for a long time. On the other hand employees who change their company constantly or in other words employees not loyal to the organization do not avail with these plans. For such employees there are many other investment plans in which they can invest at their own risk. These employees select one or more investment plans to make investment for future and select the amount of each payment, time period of investment and other factors as per their own suitability. In other words we can say that investment choice plans are modified by the employees not the employers. Return amount in these plans is associated with the market risks. Most of the choice investment plans are related to the share price of organizations providing such plans (Mouter, Van Cranenburgh, and van Wee, 2017).
When it comes to the issues of investment plans every investment plan is associated with some positive or negative impacts of several issuer related to the financial planning. Returns made through these investment plans are the saving of earnings from the influence many factors like time value of money and taxation. These issues influence the returns as per the financial market scenario and provide some gain or losses to the investments made by the employees. Some of the issues influencing the returns of different investment plans are described as follow (Arensdorf, and Brungardt, 2017).
Time value of the money is defined as the difference in the worth value of money at present time and in future. In other words we can say that an amount of money does not have the same value in future as that of at present. Core principle of the finance also suggests the providing money at resent can earn the significant amount of interest, therefore the worth of amount is much more the earlier it is available. Using the same concept of making worth of the money financial investors prefer to receive their money earlier instead of receiving the same amount in future. For such assessment of the future value of money in order to make a better investment a fundamental formula for the computation of future value off money is used by the investors. This formula is as follows (Easterday, and Eaton, 2012).
FV = PV*[1+( i / n)](n*t)
Where
FV is future value of money
PV is present value of money
n is number of compounding period per year
t is number of years
This factor considers the interest rate of market to calculate the future value of employee’s money. It provides a comparative difference in the two values of the same money at present and in the future. For the tertiary employees it helps them to differentiate between the best worst plans for their customers. While making a decision for the selection an investment plan from defined benefit plan and choice plan investors would prefer to invest in choice plans as they can choose the time period of investment in order to make more interest modifying their investment in other profitable plans. On the other hand defined benefit plans are locked for the given time period at the same rate of interest at present for the rest of time. This results in a less return due to less interest rate used for the benefit calculations (Comprix, and Muller 2011).
Inflation rate is defined as the percentage change in value or price of services and products after each year. High inflation rate requires a higher return from the investment therefore investment are to me selected to get an enough return to meet the price change due to inflation rate. In term of the influences of inflation rate choice plans are better than defined benefit plans for higher inflation rates (Asthana, 2009).
Employees invest in different investment plans to save their money from different taxes as the investment plans imposes low tax in comparison to that of the direct income of liabilities. Regarding tax exemption defined benefit plans comes under government policies therefore in this plan there is a complete exemption of the tax. In this manner it is the exceptional case among all other investment plans as other plans imposes some amount as tax reduction but defined benefit plan does not impose any tax. Many investors practice tax planning and invest in defined benefit plans because sometimes the tax is more than the return. Therefore, in such situations investing in defined benefit plans saves more money than the tax deduction in other plans (Clark, and Pitts, 2012).
Decision making is the most challenging practice for the investors. At the time of decision making investors have to consider all the advantages and disadvantages of the respective investment plans prior to make an investment. For a right investment, investors need to compare return benefits of different investment plans and then they consider the suitability of customers for the respective plan. Issues associated with each investment plan influence their credibility for its adoption by the customer (John, Koresko V John, 2015).
Analysis of different factors influencing the return benefit and worth of the investment if is highly recommended to opt an investment plan only after confirming its return outputs as well as the investment process if the respective plan. When tax exemption is taken into account defined benefit plan is way more worthy than the choice investment plan. At the same time, if time value of the money and inflation rate of the economy is considered for the investment then choice plans are more beneficial (Thompson, et al. 2012). The final decision for the selection of an effective or beneficial investment plan all the aspects need to be considered. Any recommendation for a specific investment plan without analysing its benefits and drawbacks or losses is not a professional ethic. Such type of recommendation may results in the loss of money instead of making money. Therefore, it is highly recommended to compare the influences of such issues or factors each time making a decision for better investment plan selection (Koresko, Koresko John, 2016).
Conclusion
The above analysis of the report can be concluded as the criteria for the selection of a better investment plan has a wide rage. There are many factors to be considered for the selection of a better investment plan. In some of the plans like defined benefit plans tax factor does not vary with the market but other factors may vary their respective influences as per the market scenario changes. It also concludes that the comparison of different plans has to be carried out each time when a decision is to be made for the selection of investment plan.
References
Arensdorf, J. and Brungardt, C., 2017. Civic Investment Plan: A Case Study Connecting Civic Engagement and Leadership Development. Journal of Leadership Studies, 11(1), pp.45-51.
Asthana, S., 2009. Determinants of funding strategies and actuarial choices for defined?benefit pension plans. Contemporary Accounting Research, 16(1), pp.39-74.
Choi, J.J., Laibson, D., Madrian, B.C. and Metrick, A., 2012. Defined contribution pensions: Plan rules, participant choices, and the path of least resistance. Tax policy and the economy, 16, pp.67-113.
Clark, R.L. and Pitts*, M.M., 2012. Faculty choice of a pension plan: Defined benefit versus defined contribution. Industrial Relations: A Journal of Economy and Society, 38(1), pp.18-45.
Comprix, J. and Muller III, K.A., 2011. Pension plan accounting estimates and the freezing of defined benefit pension plans. Journal of Accounting and Economics, 51(1-2), pp.115-133.
Easterday, K.E. and Eaton, T.V., 2012. Defined Benefit Pension Plans. The CPA Journal, 82(9), p.22.
Ergun, H., Rawn, B., Belmans, R. and Van Hertem, D., 2016. Stepwise investment plan optimization for large scale and multi-zonal transmission system expansion. IEEE Transactions on Power Systems, 31(4), pp.2726-2739.
Johansson, S.E.,2009. Income taxes and investment decisions. The Swedish Journal of Economics, 71(2), pp.104-110.
John, J.K.V., Koresko V John J, 2015. System and method for creating a defined benefit pension plan funded with a variable life insurance policy and/or a variable annuity policy. U.S. Patent 6,963,852.
Koresko, J., Koresko John JV, 2016. System and method for creating a retirement plan funded with a variable life insurance policy and/or a variable annuity policy. U.S. Patent Application 11/255,717.
Larcker, D.F., 2013. The association between performance plan adoption and corporate capital investment. Journal of Accounting and Economics, 5, pp.3-30.
Mouter, N., Van Cranenburgh, S. and van Wee, B., 2017. An empirical assessment of Dutch citizens’ preferences for spatial equality in the context of a national transport investment plan. Journal of Transport Geography, 60, pp.217-230.
Thompson, J.B., Gilbert, J.M. and Hernandez, J.T., BENEFIT RESOURCE Inc, 2012. Benefit management system and method. U.S. Patent 8,234,222.
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