Defined benefit vs defined contribution: who bears risk
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Q1. It is said that in a defined benefit retirement plan, the employer bears the financial risk while the employee bears the financial risk in a defined contribution retirement plan. Explain what is meant by this.
Q2. Some believe that equity-based rewards only motivate recipients to increase the price of the stock, rather than improve company performance, which in turn should result in a higher price. Do you agree with this statement? Why or why not?
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Solution Summary
Defined benefit versus defined contributions are examined. Who bears risks is determined.
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Q1. It is said that in a defined benefit retirement plan, the employer bears the financial risk while the employee bears the financial risk in a defined contribution retirement plan. Explain what is meant by this.
In a defined benefit retirement plan, the employer bears the financial risk due to the fact that they actually do commit to paying its employees for the rest of their lives very specific benefits immediately the employees start their retirement. This benefit amount is usually known beforehand and is based off various factors such as years in service, age, etc. The employer in this case takes on the sole responsibility to make every decision pertaining to the amount of money to contribute and also how to invest it on behalf of the employee until the latter reaches their retirement age (Precision, 2010).
On the other hand, within a defined contribution retirement ...
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