Discuss about the Fundamentals of Financial Decision Making.
This paper discusses the superannuation contributions made by the tertiary sector employees to investment choice plan or Define Benefit plan. Superannuation is a platform which is mostly being established by the government or the company and put forward as a rule with the intention of valuing the employees after their retirement from the work process (Yao, Lix, Shevchuk, Tear and Blackburn 2018). The employees are being deducted from their income, and the money is transferred to their account to earn interest. The superannuation contribution aims to cater for the saving and investments of the employees for their future benefits. The superannuation contribution is made up of the employer contributions and personal contributions that are in the form of assets, or in most cases cash amount, that is paid with the intention of abiding by superannuation fund, for the future use by the individuals under retirement age. Investment earnings and superannuation contributions are vital to accumulating a significant retirement nest egg. Employees can make two kinds of superannuation contribution to their super funds (Fan, Titman and Twite 2012). Their employer can either make concessional contributions to their super fund. Or they can make after-tax contributions to their super fund. A non-concessional, also called after-tax contribution is a payment that is made into the super of the employees from their after-tax income. The amount of money in this account is tax-free as the employees already paid tax for the money at the standard rate of tax (Gilson and Gordon 2013). A concessional contribution also called a before-tax contribution is the amount of money that the employees put into their superannuation from their before-tax income. This program has allowed work to gain a good understanding of the main advantages of saving for the future, most of the people who had to retire can benefit from the program thereby eliminating most of the financial crisis that affects their lives during retirement stage (McCarthy 2013).
It is also essential to understand the meaning of the Tertiary sector employees. To start with, service sector or Tertiary sector is where the production of services takes place. It is one of the three economies sectors. The first economy sector performs the duty of creation of raw materials. The second sector named as secondary convert raw material to finished goods. The third sector which is called the tertiary sector deals with the marketing and selling process of the products (Gilson and Gordon 2013). Services may include advice, experience, attention, productive labor and discussion. The actual information production can also be named as a service. Therefore, the tertiary sector employees are the workers or employees who are involved in the provision of services to the final consumers and other businesses. The services that they may offer include a sale of commodities, transport and the distribution of goods, as may occur in retailing and wholesaling. The tertiary sector employees can also represent the individuals who have the business in the tertiary sector economy (Hopkins 2011).
Define benefit plan offers employees with a fixed, predetermined amount of money as a pension on retirement. The payout or benefit is calculated using a formula which depends on the duration the employee has taken in the job market and the salary he/she has contributed as the superannuation funds (Protection and Act 2010). The employer pays most or all of the funds as well as deciding where the employees should invest the funds. The employee obtains the defined amount as promised regardless of whether the amount spent in determined benefit plan yield more or less returns. There are different types of Retirement plans such as a defined contribution plan and Defined benefit plan (Stohl and Chen 2018).
There are many factors which the Tertiary sector employees have to consider when deciding whether to be part of the Defined benefits plan. This is because DB scheme is a type of investments plan and there are varieties of risks which the employees will encounter. The two main factors which the employees have to consider is time and risk tolerance. Before the employees undertake any decision regarding the investments, they have to take a look at themselves and check at their financial situation. The first step is for them to figure out their risk tolerance and goals either with the help of the experts or on their own. This is because it is not assured deal that the money invested will yield a good return in the future (Hawley, Johnson and Waitzer 2011). Time may represent the duration after the retirement that the employees will take to receive the amount invested. The time duration should be short to allow the employees who have retired from the work to satisfy their demand out of the money spent on the scheme. There are inherent risks that are associated with all types of investments. The employees have to understand all the types of changes that they will encounter during the process, and this will act as the first step of managing those kinds of risks. The other kinds of risks that are associated with the investment in DB scheme include inflation which increases the cost of living and devalues the dollar; it mostly reduces the purchasing power of the amount of money (Paradi, Sherman and Tam 2018). This means that the members of the DB scheme will withdraw a significant amount of money to maintain their living standard. Another type of risk is the interest rate; low-interest rate may affect the overall outcome of the amount invested in the scheme. Lastly, there may be accounting risk in that the FASB can change disclosure and accounting requirements for Defined Benefit Plan (Rauh, Stefanescu and Zeldes 2017). It is therefore advisable for the Employees to evaluate all the risks that they will encounter. It is also desirable that they have a good understanding of all types of risks be before making a step of investing since they could either lose all or some of their money (Bass, Greenberg and Kishinevsky 2018). The employees could lose their principal, which represent the amount they have invested in the scheme through inflation which reduces the amount spent by the members. Rigid administrative rules may also lead to the reduction of the amount spent by the employees in the DB plan. Otherwise, there are rewards associated with taking risks in every type of investments, a long time horizon and the financial goal may make employees to earn a higher investment return in the long run. Additionally, cash investment is only suitable for the business targets which are short-term (Geyer and Ziemba 2013).
The employees have to consider the cost of the dollar in the market. They have to use the strategy known as the Dollar cost averaging to protect them from the future risks associated with the investment in the DB scheme. The employees will benefits more when the value of the dollar is high because they will buy more investments using the little amount that they contribute to the DB scheme. Therefore it is advisable that the employees consider the value of the currency in the market before making any steps of putting their amount in the investment choice plan (Arteaga 2018).
The employees should also shun conditions that can contribute to fraud. They should first seek information about the DB scheme to verify that it is the required pension plan which is established for the benefits of all the employees. Every country especially Australia has developed ways in which they cater for the old people and any working institution must follow the rules and regulations enacted by the government. So it is the responsibility of the employees to identify the required DB scheme which is established by the law (Glaum, Keller and Street 2018).
The Tertiary sector employees have to consider the most suitable mix of investments. They should include asset categories which gave got higher demand in the market (Landon and Smith 2018.) This will protect them from unnecessary losses. They must consider investing in asset categories that will yield a higher return in the future. It is also advisable that they spend their amount in more than one asset to help spread the risk. The allocation of the assets is quite crucial since it is a determinant factor of the employees’ financial goals (Maher 2011). The employees have to include enough risk in their portfolio.
The Tertiary sector employees should also consider maintaining and creating an emergency fund by setting a saving plan to protect them from unforeseen events like sudden loss of employment. This amount set aside will help them in future in cases there is an emergency that needs to be solved immediately (Hawley, Johnson and Waitzer 2011).
Lastly, it is advisable for the Tertiary sector employees to consider the actual regulation and rules that handle issues of retirement benefits. The government rules and management will help them identify whether the DB scheme performs or work under the stated rules and regulation of that country.
Tax is the actual payment by the employees which are mostly being deducted directly from their salaries or indirectly from the services that they consumed.
Tax planning helps the employees to make wise investments and save well. It enables the employees to be aware of the different provision that will assist them in lowering the tax liability. The investments mostly come in the form of financial assets and physical assets each of them having separate returns. Tax planning can help the employees in managing their finance by considering post-tax and tax liability. Future planning enables the employees to improve yields as well as reduce tax commitments and all these processes assist the employees in making a financial decision. Tax planning is taken to be essential for the employees who are earning a salary because it is assumed that it reduces the pressure of price hike, inflation and the obligation associated with the compliance in tax (Podgursky and Pendergrass 2018).
Time value of money is an essential concept that is relevant to any financial decision-making process. The idea of TVM state that cash in hand now is of more importance than money received in the future. This is because an individual may decide to invest that amount today which will then earn interest and this, in turn, will increase the financial assets of the employees. The concept is also useful since the individuals can use the money in meeting their daily needs. TVM is exceptionally crucial in any decision making that deals with the use of funds. So, the employees have to consider both the risk and timing to make a decision that will maximize the returns that they will get in the future. The employees may prefer the money today because tomorrow there may be inflation which will lower the value of the money. Another factor that may affect the future value of money is the uncertainty. There may be future risks which will affect the value of the amount in future (Kruse, Blasi and Freeman 2012).
Conclusion
Defined benefits plan are essential retirement program that enables the employees to save for their future spending. It also offers complete benefit coverage. The only issue that affects DB scheme is the costs (Podgursky and Pendergrass 2018). The Tertiary sector employees have to consider some factors when deciding to be part of the investment choice plan. Two of the main factors that they will have to find is the risk tolerance and Time horizon. These two plus other factors will help them in the decision-making process. It is also true that the employees should also consider taxes during their decision-making process. This is because Tax planning can help the employees to reduce the tax liability associated with a particular mix of the assets.
References
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Bass, B., Greenberg, D. and Kishinevsky, M., 2018. Strategic Portfolio Allocation With Factors. In Factor Investing (pp. 265-283).
Fan, J.P., Titman, S. and Twite, G., 2012. An international comparison of capital structure and debt maturity choices. Journal of Financial and quantitative Analysis, 47(1), pp.23-56.
Geyer, A. and Ziemba, W.T., 2013. The Innovest Austrian pension fund planning model InnoALM. In HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING: Part II (pp. 491-504).
Gilson, R.J. and Gordon, J.N., 2013. The agency costs of agency capitalism: Activist investors and the revaluation of governance rights. Columbia Law Review, pp.863-927.
Glaum, M., Keller, T. and Street, D.L., 2018. Discretionary accounting choices: the case of IAS 19 pension accounting. Accounting and Business Research, 48(2), pp.139-170.
Hawley, J.P., Johnson, K.L. and Waitzer, E.J., 2011. Reclaiming fiduciary duty balance.
Hopkins, B.R., 2011. The law of tax-exempt organizations(Vol. 5). John Wiley & Sons.
Kruse, D.L., Blasi, J.R. and Freeman, R.B., 2012. Does linking worker pay to firm performance help the best firms do even better? (No. w17745). National Bureau of Economic Research.
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Maher, B.S., 2011. The Benefits of Opt-In Federalism. BCL Rev., 52, p.1733.
McCarthy, D.D., 2013. Longevity insurance annuities in 401 (k) plans and IRAs. Benefits Quarterly, 29(1), p.58.
Paradi, J.C., Sherman, H.D. and Tam, F.K., 2018. Securities Market Applications: Pension, Mutual and Hedge Fund Insights with DEA. In Data Envelopment Analysis in the Financial Services Industry (pp. 207-231). Springer, Cham.
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Rauh, J.D., Stefanescu, I. and Zeldes, S.P., 2017. Cost saving and the freezing of corporate pension plans.
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Yao, S., Lix, L., Shevchuk, Y., Teare, G. and Blackburn, D.F., 2018. Reduced Out-of-Pocket Costs and Medication Adherence-A Population-Based Study. Journal of Population Therapeutics and Clinical Pharmacology, 25(1), pp.e1-e17.
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