This report has been developed for discussing and analyzing the important features of superannuation plans that are, defined benefit and investment choice plan. This has been done to support the decision-making process of tertiary sector employees whether to place their superannuation funds in the defined benefit or investment choice plan. The role of time value of money in this decision-making process is also discussed in detail. At last, the report provides an evaluation of the statement ‘If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin’.
Factors under Consideration for tertiary Sector Employees to Decide the Superannuation Contributions for Placing under Defined Benefit or Investment Choice Plan
The superannuation contributions refer to the funds invested in the pension plan by the employer as a means of resolving income to the employees during their retirement’s years. The superannuation funds are extremely important for tertiary sector employees as they are the employees engaged in service jobs and thus should develop for them sufficient amount of money to secure their retirement period. There are various types of superannuation schemes available for the employees that help them to secure money to be used for their retirement (Leow, J. 2009). The most important ones are defined benefit and investment choice plan that are discussed as follows:
This type of superannuation plan provides a fixed source of income for the tertiary sector employees after their retirement. The employer is responsible for managing and controlling all the decisions relating to the investment under this type of plan. The retirement income is fixed as it is calculated through the use of a definitive formula that is based on age, salary, service years ad other factors of employment. The employees receive the income as a lump sum amount after retirement or in periodic payments under this type of plan. The overall portfolio is managed by the employer and thus employees receives only fixed amount with no extra benefits on account of portfolio performance. The employees receive lifetime protection under this type of plan and thus they can secure their future without taking any risk. The poor performance of the portfolio does not impact the payout received by the employees (Kolb, 2009). The plan is very beneficial for the experienced employees as they receive larger benefits on account of their age and employment tenure. The employers can maximize the benefits received by the employees under this type of plan with effective tax deductions. Another benefit of this type of plan is that employees also have not to spend time in deciding about the amount to be contributed to the plan. The company assumes the full responsibility of taking all the decisions relating to the investment and still receives their full payment on time (Leow, J. 2009).
Apart from the benefits of this type of plan, there are some disadvantages of this type of plan that should also be considered by the employees at the time of selecting this plan as their superannuation plan. The extra benefit based on the portfolio performance is not received by the employees but are received by the employer. In addition to this, the employees can’t receive the benefits without attaining their retirement age. Thus, in the occurrence of any emergency condition, the employees can’t utilize their pension money as they can get the money only after their retirement (Fiestas et al., 2010). Also, the employees who leave their employment tenure before completing their retirement age does not attain good benefits under this type of plan. This means that payouts received by the employees in the defined benefit plan are directly related to the employment factors and thus an older employee receives large benefits as compared to younger employees. The defined plans are also complex to be understood by the employees and also involve huge administrative costs for the employer to maintain them (Graney, 2004).
The investment choice plan involves providing the rights of managing the superannuation funds to the employees instead of the employers. The employees can invest their super funds in variety of assets under this type of plan such as shares, fixed interest, and property. There are different types of investment options provided under this type of plan to the employees as follows:
The major advantage of this type of plan is that employees can decide their investment options based on the risk and return characteristics of each. Also, the retirement payout under this type of plan is not impacted by the terms of employment such as age or salary history. The employees can receive higher returns under this type of plan as compared to the defined benefit plan. The growth or balanced strategy is suitable for the employees are suitable for long-term investor while conservative option is appropriate for the employees who want to invest for short-term. The major limitation of this type of investment choice plan is that employees have to bear all type of investment risk and thus have to invest time for analyzing and creating their portfolio. Thus, all the above mentioned factors should be considered by the employees at the time of deciding their superannuation contributions placement under defined benefit or investment choice plan (Graney, 2004).
Time Value of Money Significance in Decisions Relating to Superannuation Funds Investment
The time value of money principle holds that money has the potential of earning and thus the present value of money is more than the same amount in the future. This is because money has the capacity to earn interest and thus any amount of money at present time has high value than in the future time. The principle states that present value of investment will grow in future period of time known as future value due to potential earning capacity of money. The difference between the present and future value of money depends on the compounding periods involved in the investment. As per the principle of time value of money, the money has time value due to uncertainty existing in the future and the impact of inflation on the purchasing power of money. The time value of money concept can prove to be highly significant for taking decisions relating to place the superannuation contributions under the defined benefit or investment choice plan. The time value of money provides tow important techniques for estimating the present and future value of an investment that are, discounting and compounding technique (Nicholson, 2011). The incorporation of both the technique will help the employees to decide about the amount of investment to be done today for realizing a specified amount in the future period of time. The discounting method will help the employees to decide about the amount to be invested as superannuation funds at present to realize a respective amount in the future context. On the other hand, compounding method can be used by the employees to ascertain the future value of present investment (Hirt, 2010).
The defined benefit plan involves realizing fixed income for the employees after their retirement and thus the use of discounting method can help the employer to decide the amount that need to be invested at present that will provide a specific amount. The payout is not fixed in the investment choice plan and thus the use of compounding method can help in determining the future value of present money invested under this plan. The present value of investment under the investment choice plan can be determined through the help of asset prices. The investors can analyze and examine the present or future value of their investment through the application of the concepts of time value of money (Ellis, 2013). The principle provides a practical demonstration in front of the employees about the benefits that the employees will achieve by their superannuation funds in the future period of time. Thus, the concept of time value of money can prove to be very useful in determining the benefits that will be realized under both the defined benefit and investment choice plan thus selecting the best plan providing maximum gains (Ehrhardt and Brigham, 2016).
‘If the Efficient-market Hypothesis is true, the pension fund manager can select a portfolio with a pin’
The efficient-market hypothesis advocates that asset prices provide all the useful information to the investors about that particular asset. The theory suggests that investors can never outperform the market as the arrival of any new information in the asset prices are immediately reflected in their prices. However, if this is the case, the investors can never outperform the market but investors are able to realize higher returns than the market. Thus, it can be stated that market does not operate in entirely perfect conditions as a result of which investors are able to earn profit from the market. The theory of efficient-market hypothesis sis true, then all investors would realize same returns from their investments as the market information about assets are equally available for the investors. This is not the case as some investors are able to realize higher returns while some lower indicating that information about assets are not perceived in same manner by the investors. The efficient-market hypothesis believes that market cannot be beaten by the investors, but this is not true as investors can reduce the market fluctuations through the use of diversification (Ang et al., 2011).
As such, the role of pension fund manager has to create a well-diversified portfolio for its clients so that they receive maximum income after their retirement. Thus, the pension fund manager cannot select a portfolio without proper analysis and examination of the risk and return features of the assets. The efficient-market hypothesis if true, then pension fund manager can easily develop a portfolio with a pin. However, this is not the case as pension fund manager has to diversify the market risk well at the time of developing portfolio in order to earn maximum returns. The diversification is done by investing in variety of assets that are not co-related with each other so that if one asset outperform it is managed by the higher retunes gained from other performing assets (Maginn et al., 2007). The pension fund manager examines the past and present return characteristics of an asset before taking decision of its placing in the portfolio and cannot select the assets by only relying on their prices. The asset prices do not reflect all the necessary information about an asset as stated by the efficient-market hypothesis. The price does not reflect the risk and return profile of an asset that is to be analyzed by the pension fund manager before taking investment decision (Faerber, 2013).
Conclusion
Thus, it can be stated from the overall discussion of the report that the decisions relating to placing the superannuation contributions depend on the needs and preferences of the employees. The employees can decide about their superannuation strategy by carefully analyzing the important features of both the defined benefit and investment choice plan. The time value of money concept will support this decision-making process of employees. Also, the report has explained that pension fund manager cannot select a portfolio with a pin and thus the theory of efficient-market hypothesis does not hold true in all regards.
References
Ang, A., et al. 2011. The Efficient Market Theory and Evidence: Implications for Active Investment Management. Now Publishers Inc.
Ehrhardt, M. C., and Brigham, E.F. 2016. Corporate Finance: A Focused Approach. 6th ed. Cengage Learning.
Ellis, C. D. 2013. Winning the Loser’s Game, 6th edition: Timeless Strategies for Successful Investing. 6th ed. McGraw Hill Professional.
Faerber, E. 2013. All About Value Investing. McGraw Hill Professional.
Fiestas, H.V. et al. 2010. Better Returns in a Better World: Responsible investment – overcoming the barriers and seeing the returns. Oxfam.
Gitman, L. J. et al. 2015. Principles of Managerial Finance. Pearson Higher Education AU.
Graney, P. J. 2004. Retirement Savings Plans. Nova Publishers.
Hirt, G.2010. Investment Planning. McGraw Hill Professional.
Kolb, R.W. 2009. Corporate Retirement Security: Social and Ethical Issues. John Wiley & Sons.
Leow, J. 2009. Australian Master Superannuation Guide 2010/11. CCH Australia Limited.
Maginn, J. L. et al. 2007. Managing Investment Portfolios: A Dynamic Process. John Wiley & Sons.
Nicholson, C. 2011. Building Wealth in the Stock Market: A Proven Investment Plan for Finding the Best Stocks and Managing Risk. John Wiley & Sons.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download