What do you think are the important factors that should be considered by tertiary sector employees when they are deciding whether to place their superannuation contributions in the Defined Benefit Plan or the Investment Choice Plan? What issues relating to the concept of the time value of money, taxes etc., might be important in this decision-making process? Explain.
The tertiary services consists the production of services instead of the production of any end product. These are intangible but require a lot of attention, advice, experience and affective individuals to provide such services. This is an arrangement to provide the services from business to the final consumer. They perform as an interlinking chain between the business and the consumer. These Services may involve the service under health, banking, education and insurance sector. It also includes several kinds of other services such as transport, entertainment, sales and all the services which are related to the hospitality.
The tertiary employees are in pace to gain their better salaries and also some other benefits. Superannuation benefit is one out of those major additional benefits. Superannuation is a kind of a benefit that is offered to the employees by their employer. The employer makes a contribution every year on the behalf of the employees towards the superannuation policy held by the employer. The employee too deposits an amount towards such policy through the deduction from his salary. This is a kind of pension plan. Most of the companies offer a superannuation benefit to their employees as an added incentive to work for longer tenures with the company. It encourages the employees to improve their performance and also provide them a financial security (Butler, 2016).
Defined Benefit plan is an employer sponsored retirement plan, where the benefits to employee computed after considering various related factors such as tenure of his service, age and the salary history. The employer made a periodic contribution to such fund and the contribution rate is periodically observed by an actuary. The size of the superannuation fund depends on how well the employer did managing the money. This is simply a function of a basic formula which includes the factors in how long the employee worked for the company and how much he earned.
Such amount of fund is promised to be paid to the employee at the time of his retirement. At the time of retirement, the employee has two options. He can choose to withdraw the entire amount of fund of superannuation fund or he can use that fund as a pension product.
The most significant decision, which the employee will have to make about his retirement income, is to choose the right superannuation fund. In such investment plan the employer makes a fixed contribution to this fund and the employee can also make his voluntary contributions towards the funds as well. So it’s vital that you have the right fund for your needs. While making the investment, Knowing the superannuation benefit and superannuation amount is important for employee for better investment. It is an accumulation plan of income. In this plan the employee is in the power to get his income accumulated at any higher rate of interest. The returns and benefits under this plan depend upon the chosen portfolio of investment by the employee for the accumulation of his income (Butler, 2016)
It is a major financial decision on the part of the employee to choose the investment choice plan for his superannuation funds. Due to the uncertainty and risk factor the employee falls in a situation where he makes decision on the basis of several parameters even if they are not related to the final benefits that they will be getting in the future. Every investment plan has its own pros and cons. The thinking and decision making theory of every employee varies from one to another, that leads them to make an overall analysis of possible results/outcomes from every investment. The outcomes from any investment based on the various factors such as the age of employee, financial stability, mobility of employee. Apart from that many outside factors like inflation, market, interest rates etc. also influences the possible outcomes of an investment (Evans, and Razeed, 2017).
The age of employee is a significant factor in investment decision making. If the employee is of the young age than he can choose the long term investment plans, because there rests a long tenure between his investment and realization of results (Taylor, 2017). He can also invest his funds in the investments, which have higher return possibilities with higher risks as he can resist the market ups and downs. The young investor can also make his investment portfolio effective as per the economy and market. But the employee is of the old age, want the benefits in near future and they cannot invest their money in long term plans. They couldn’t access the market movements and risk. So, they would want a secure and protected outcomes from investment even if, the average of returns is lower (Samarkovski, et al. 2017).
The financial status of an employee is also an important factor in investment decision making. The employees, who are financially efficient, take higher risk to earn the high benefits. But the employees who are just earning to fulfill their daily requirements are not able to make much experiment with their funds and go for the secure benefit plans. They invest their funds to make their future secure, not to earn the higher outcomes from their investments (Clark, et al. 2016).
Employee mobility or the frequently changing of jobs also turns out to be an influencing factor in decision making. The employees who change their jobs frequently should opt for accumulation plans so that the benefits from every employer get accumulated and it restricts the erosion of benefits. But it is not possible in the Defined Benefit Plans where the frequent job changes lead to opening of new Defined benefit plans. And this results into the erosion of the overall benefits of the single employee (McIlroy, 2018).
The major factor which influences the investment decision is the relevant information of investments. An employee who is well informed can make the better investment decisions. An investor should be aware towards the information about all the factors which have an impact on the investment returns. A well informed investor is better than an ill-informed because he can make better returns by taking less risks. Here the gender also arise a differences. The Research says that men are more congenial to high risk as compared to women (McAllister, 2017). They are likely to engage in more risky investment which provides the higher outcomes. Investment choice plans are riskier than the Defined benefit Plans as there are more uncertainty and the risk factor is on high level. On the other hand the Defined Benefit Plans are much more secure because there is less uncertainty in the benefits. Similarly the investment plans gave better returns as compared to the Defined Benefit Plans because it varies with the market movements. A hike in market movement gave a rise in the returns also. The market movements affect the returns negatively and positively (Drew, Walk, and West, 2016).
Some of the employees choose the investment plans by comparing the past performances of the two. They make an analysis of the past history of the plans and make a sound investment decision on the basis of that. They compared the past performance of these plans for a certain time and assess their actual outcomes. This is a comparison based assessment which helps the investor to choose the right plan. But every investor does not have the same mind. An investor who has a sound knowledge of finance and market conditions would always go for an investment choice plan over the Defined Benefit Plan (De Zwaan, Brimble, and Stewart, 2015).
The tendency and personal interests of an individual also plays a vital role in the investment decision. A person, who has keen interest in market fluctuations and the theories of variations in products, will always choose an investment choice plan. On the other hand a person wants a secure return from his funds and does not want to take high risks would go for the Defined Benefit Plans (Bianchi, et al. 2016).
The time value of money is a core concept of finance, which states that money available at the present time is worth more than the same amount in the future. This is based on the potential earning capacity. The principle argues money can earn interest and increase in value over time, therefore it has a greater worth in the present. It means money which is lying idle or blocked is a waste asset. But if that money is invested properly than it gives the returns in form of interest or profits, which increase its worth. On the basis of the time value of money, the choice investment plan is a better option to invest because it provides the earning returns in form of portfolio interest. At least the money is not lying idle as accumulated funds. Whereas in the Defined benefit Plans a person contribute his funds for a specified future return. This amount of contribution has been decided after comparing various factors such as the age of employee, his tenure of service, salary etc. The amount of contribution made under this plan has no further earning as an interest or earning returns. So on the basis of the time value of money, the Defined benefit plans has no further earning options after once contributing into the fund (Baldwin, 2016).
Taxes are the mandatory financial charge that is to be made to the government on any income or gain. Taxes do not provide any return as they are the charge on our income without any return. An investor should make the tax planning with the objective of minimizing the tax liability and maximizing returns. Everyone should try to do tax planning to maximize his income by saving on taxes. In case of Defined benefit Plans; the tax liability is raised only to the amount contributed to the funds because there is no further earning on such amount. But in investment choice plan the earnings from investment are also liable for the taxation and disclosure also. This may be the reason that the investor avoids to opt for an investment choice plan (Clark, Fiaschetti, and Tufano, 2016).
Every employee who is looking for the investment options for investing his superannuation funds to create value of them via Defined Benefit Plan or Investment Choice Plan should always consider the concept of time value of money. It proves out as a remedy in risk erosion of value loss of money (Voit, and Carson, 2014).
Before making any investments the employees should study the available investment options and should choose the plans which have less risk with higher returns (Mazowita, and Greenland, 2016).
The tertiary sector employees should assess the performance of investment plans before investing in both Defined Benefit plans and Investment Choice plans. They should make the investments as per their interest and by keeping in their mind all the influencing factors of any investment (Wilson, 2016).
Conclusion
Tertiary sector employees performs a major role in the economy and their rewards are solely depends on their performances. So, to motivate them for better performance, several benefit plans apart from the salaries are provided to them. They are free to choose the option for the investment of their benefit plans. The investment of superannuation funds is a major decision which can be affected by various factors. Out of which, some of the factors we have discussed above. Many changes and improvements in such plans and schemes are being made from time to time for the betterment of the employees and for easy operations.
References
Baldwin, B., 2016. Municipal Employee Pension Plans in Canada: An Overview. Institute on Municipal Finance and Governance.
Bianchi, R.J., Drew, M.E., Walk, A.N. and Wiafe, O.K., 2016. Fiduciary challenges in a low-return world. Investment Magazine, (127), p.12.
Butler, D., 2016. Superannuation: Transferring foreign super fund amounts to an Australian resident. Taxation in Australia, 50(8), p.481.
Clark, G.L., Fiaschetti, M.A.U.R.I.Z.I.O. and Tufano, P., 2016. Approaching Retirement: The Categories, Timing and Correlates of Advice Seeking. Financial Decision Making and Retirement Security in an Aging World, Wharton School, University of Pennsylvania, Philadelphia, 5.
De Zwaan, L., Brimble, M. and Stewart, J., 2015. Engagement with superannuation:’Is there really a gender gap?’. JASSA, (4), p.12.
Drew, M.E., Walk, A.N. and West, J.M., 2016. Withdrawal capacity in the face of expected and unexpected health and aged-care expenses during retirement. The Journal of Retirement, 3(3), p.77.
Evans, J. and Razeed, A., 2017. Adequacy of the Australian superannuation guarantee levy: A post-retirement analysis. JASSA, (1/2), p.6.
Mazowita, B. and Greenland, J., 2016. Police resources in Canada, 2015. Juristat: Canadian Centre for Justice Statistics, p.1.
McAllister, J., 2017. A national plan for closing the gender pay gap is overdue. Investment Magazine, (140), p.24.
McIlroy, J., 2018. Will super fund Trump’s infrastructure plan?. Green Left Weekly, (1171), p.2.
Samarkovski, L., Copp, R., Wiafe, O.K. and Freudenberg, B., 2017. The impact of tax on the prospects of achieving target retirement wealth in Australian default superannuation plans.
Taylor, S., 2017. Could we nationalise the superannuation system even if we wanted to?. The Conversation, November (121), p.2.
Voit, K. and Carson, D., 2014. Post-retirement intentions of nurses and midwives living and working in the Northern Territory of Australia. Rural and remote health, 14(2339).
Wilson, E.H., 2016. Employee pension plans. Law and Contemporary Problems, 15(3), pp.340-352.
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