The paper "Public Pension Promises" is a great example of an assignment on finance and accounting. Why have employers wanted to shift from DB to DC plans? What is the difference in accounting treatment for a public traded company sponsoring a DB plan versus a DC plan? When viewing from the employee perspective, the Defined Benefit (DB) plan is advantageous because the employer funds the plan. The employers realize the rewards of the DB plan upon the retirement of the employee because they keep and spend the money earned by the employees.
For the DB accounting plan, the accounting system applied is accrual accounting. The present value of the future benefits is set equal to the pension plan liability. On the other hand, the DC pension plan employs the cash accounting system. Why have employees accepted and often embraced the shift from DB to DC plans? What are the potential negative effects of this shift for employees? Defined contribution plans are inefficient if compared with defined contribution plans. This is amidst the assumption that the defined contribution plan saves money. The DB Plan is considered to have benefits of higher returns on investment, economies of scale and risk pooling. This shift from DC to the DB has negative impacts as the employers mistake cost savings for cost-shifting.
(Novy, Robert, & Rauh, 1212 ) This misguidance causes the overall costs to rise steadily, as the retirement security plummeted. The DC plans do not exist in the public sector; therefore, the workers in this sector are contributing to the payment of pension. This shift in plans does not act to save the taxpayers from spending more money. Despite the minimal transaction costs, the participants required to contribute two times, more than the traditional defined benefit. Is employer stock an appropriate investment alternative for DC plans?
Should there be a limit to the amount of employer stock held in any participant's account? The contributions that are employer directed are the dominant source necessary for the participants to hold a concrete position on the company stock. (Novy, Robert, & Rauh, 1215)In addition to this, there should be a limit to the employer stock, as the participants are more likely to hold the concrete company position.
This limit is stipulated at 20% more than the investment made by the employer stock. The odds that accompany having a concentrated position rise with employers directing other non-matching contributions into the company stock. How many funds are too many for a 401(k) plan? Should 401(k) plans allow trading in individual securities as well as mutual funds? (Discuss requirements of the number of funds that must be offered as well)The 401(k) plan that has 25 investment choices has too many funds. This is because the availability of many funds possibly paralyzes the investors, and this causes massive losses when the investors lack advisors.
The 401(k) plan should allow trading in the individual securities, and this plan should offer not more than seven funds. The fund should have two or three bond funds, with an offer of three or four equity funds. (Novy, Robert, & Rauh, 1223) In addition, the plan should have an investment option exposure platform for various assets and commodities.