Which of the following is true of defined contribution plan?Question 4Answera.It provides an explicit benefit which is easily communicated.b.It is more favourable to long-service employees.c.It does not require managing of surplus or deficit in pension fund.d.It makes the employer accountable for the risks associated with changes in inflation and interest rates.e.It does not make employer costs known.
Question
Which of the following is true of defined contribution plan?Question 4Answera.It provides an explicit benefit which is easily communicated.b.It is more favourable to long-service employees.c.It does not require managing of surplus or deficit in pension fund.d.It makes the employer accountable for the risks associated with changes in inflation and interest rates.e.It does not make employer costs known.
Solution
The correct answer is c. A defined contribution plan does not require managing of surplus or deficit in pension fund. In this type of plan, the employer, employee or both make contributions on a regular basis. The final benefits received by the employee depend on the returns on the investments made with these contributions. Therefore, there is no surplus or deficit to manage as the risk is borne by the employee, not the employer.
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