BUS286 Corporate Finance-Portfolio Management 

What 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 may be important in this decision-making process Explain. The efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pinExplain why this is not the case. 

The service sector and the tertiary sectors employers do not have right to control the decisions of the employees to invest in which type of fund in the matter of superannuation funds. The employees are free to choose the fund as per their choice. The service sectors and tertiary sectors are divided in three types of sectors. Superannuation fund are of two types namely defined benefit plan and investment choice plan. The employees do a wide research and gain a depth of information and knowledge before investing and conduct all studies of the various factors affecting the fund’s performance in the market. The following information is helpful in providing the information related to both the funds by which the employees are able to select the proper and most beneficiary fund for their investment and to get the best results for future on their investments.

Investment Choice Plan 

The investment choice plan is an employee oriented plan. The investment choice plan gives the employees a liberty to any time change or modify the investment procedures. The employee in investment plan also give right of decision making. All the investments related to superannuation can be processed through one account which is held under the investment choice plan. Another benefit of investment choice plan to the employees is the amount of investment is not fix, it depends on the employee himself how much he wants to invest. The investment choice plan has the contribution of both employee and the employee in all the sets of earnings, gains and interest also (Most & Wadia, 2015). The investment choice fund is secure funds. The investment options included in investment choice plans are secure bank, stable funds, Trustee's funds and share funds these funds make investment choice plan a secure plan. One of the liberties to the employees in investment choice plan is that the employees can make their portfolio for the investment which is already made by them. 

Defined Benefit Plan 

Defined benefit plans is a traditional way of plans. The amount of which will be paid to the employee at the time of maturity or his retirement is first decided in advance in Defined Benefit Plans. The amount of contribution of the employee and employer both is involved. Some part of salary of the employee is deducted rest of the payment is contributed by the employer. Defined Benefit Plan is a low risk investment as it is not directly linked with the market. The ration of contribution between the employee and his employer is based on different facts like the number of years the employee has worked and the years left in his retirement, the salary of the employee has a big consideration (Basu & Drew, 2010). The full and final payment of Defined Benefit Plan investment is done at the time of retirement and as the pension amount which would be received by the employee at the retirement is also been decided Defined Benefit Plan. Defined Benefit Plan is also used by the employee as a tool of increment. There are three types of Defined Benefit Plan:

On the basis of how years the pension would be paid is to the employee this plan of Defined Benefit Plan includes pensionable services. The amount which would be drawn by the employee at the time of his retirement is another type of Defined Benefit Plan. The total amount which will be provided to the employees when the scheme will end is based on the accrual rate. 

Defined Benefit Plan calculation 

The calculation of Defined Benefit Plan has many factor to be considered such as the number of years the tertiary sector or service sector employee has worked in the firm, the number of years left for the employees retirement, the accrual interest rate and the most important the employee’s salary. The formula with these factors derived is - number of years the employee has worked x salary of employee at the time of retirement x accrual rate (Choy & Officer, 2014). There employees get some additional benefits with investment in Defined Benefit Plan like fixed and bulk amount. These benefits are fixing and received at the time of maturity. The investment in Defined Benefit Plan provides tax benefit to the employees on the amount invested. Various other benefits are observed under the investment with Defined Benefit Plan. 

Types of Defined Benefit Plan 

The Defined Benefit Plan is divided into set of two types funded and unfunded benefit plans. Funded benefit plan are considered to be those funds in which the investments on assets and stocks are considered. Whereas on the other hand the assets investments are not considered in the calculation of funded plans (Gorham, 2002). As the assets are not considered in funded plans one major drawback is faced, the amount of funded benefit plan is a fix amount cannot be provided to the employees at the time of maturity cause the estimate of this amount cannot be made at the beginning of the investment. 

Factors effecting decision making of the employees of tertiary sector 

Financial goals: The most important factor for any investment is growth of money. Money to be received at a certain time to meet the future needs is considered as financial planning. To fulfill such needs financial planning is done. The goals differ from employee to employee. The financial goals are time dependent. Some employees look for profit from the investments, then the investment choice plan is the best choice for them. In case the employee wants a fixed amount as direct payment or in form of pension then the Defined Benefit Plans is the best option for investment (Steyer, 2011). 

Risk levels: The employees looking for higher profits on their investments have to face higher risk as such investments are directly related to the market. Higher the risk higher the profits. Such employees have the option to invest in the plans of investment choice plan. Where the Defined Benefit Plans are of low risk and considered to be safe. These investment plans are not linked to the market hence to effect of market fluctuations. The employee gets the fix amount as decided at the time of investment (Goldhaber & Grout, 2016). The defined benefit plan is opted to get a fix amount. The investment choice plan includes the investment in shares, trustee's funds etc, these funds have direct impact of market on them. 

Time of investment: Future is the frame for which the planning is done. The requirement of funds could be long term or short term it depends on person to person. The time plays an important role in choosing the plan for investment. In investment choice plans time could be short or long (Holzmann, Palmer & Robalino, 2012). The employees who are planning for short term investment they can invest with the plan in investment choice. Whereas long term plans with fixed amount at maturity are listed under Defined Benefit Plan. Investment of those employees is attracted who are willing to wait for long period (Tetrick et al., 2010). 

Rate of inflation: The market state in which cost of living and dearness keeps on increasing this state of market is known as inflation. The superannuation contribution has an effective impact on the decision making in the choice of the plans by the employee. The Defined Benefit Plan is not much affected by the rate of inflation as this plan is for long time investment plans (Mark, 2009). Defined Benefit Plan gets proper support of time to overcome the effect of inflation, as a result of which the value of the same declines as the time passes. The employee contributes more and more if he chooses the Defined Benefit Plan for his investment plan (Webb, 2011). 

Drawback of time value for money 

Time is money, but the value of money declines with the time. It is very important to take the time value for money in to consideration as it is very important for the understanding that the value of money declines with the time pass. Every plan has its different aspects, so as the both investment choice plan and Defined Benefit Plan have different aspects of their own of lighting processes. Inflation and market conditions have a very important impact on time value of money. Time value of money helps in making the right choice for the right investment plan for the employees (Magill & Quinzii, 2010). The employees get correct directions to invest for their retirement. A proper analyze of the pension of the employee can be done with time value of money. The drawback in time value of money is of maintaining the records of the cash inflow as well as outflow. As for the calculation of net present value of superannuation and the amount which is to be paid to the employee at the time of maturity as pension cannot be calculated without help of time value money. It's very tough for the employees to maintain this record and this is the biggest drawback faced. 

Efficient Market hypothesis

The commodity price as well as the value of the stock and assets plays a role to represent the value to the organization this market state is called efficient market hypothesis. It could also be termed as the market situation in which the actual position of the organization is determined with the help of price of the stock of the organization, the values of the assets of the organization and the price of the commodity of the organization (Jovanovic & Schinckus, 2016). The efficient market is incompatible with the various things which keep on changing with the market conditions it includes the price of the assets value also. The present position of the company in the market is considered while making decision for investment. Shares and stocks are purchased for investment in efficient market and no previous information or track records are to be studied (Kadir, 2010). 

Pension fund manager in portfolio management 

The Efficient market hypothesis is hampering the role of fund manager. No past records are to be tracked in this market situation.  The role of fund manager is to manage the past records and give an analytical report to the investors. Efficient market hypothesis is the situation which works on current market situation only. In this market situation no old records are needed in case any such need arises than the fund is needed, other the role of fund manager is diminishing in efficient market hypothesis market situation. The Efficient market hypothesis market situation is negative situation for the fund managers (Blake et al., 2013). In such market the fund managers will disappear from the market as not portfolio is left for them.

These services are provided by the companies as they provide a proper set of past proper track records to the individual for their decision making. The pension fund manager cannot provide his service in the efficient market hypothesis market as not past records are required for the investments in such market situation only the current market activities are considered in efficient market hypothesis market (Sun & Teo, 2017). In the real world no such market exists. The employees or investors will need the fund manager as to know the past performance of the companies and their funds. The pension fund manger give his suggestion on the basis of the past analysis he has done to the investors looking forward for investments as which fund to be funded in and which funds will not give desired returns to the investors (Zhang et al., 2012). Efficient market hypothesis is the market situation in which the fund manager has no role to play. 

References

Basu, & Drew. (2010). The appropriateness of default investment options in defined contribution plans: Australian evidence. Pacific-Basin Finance Journal, 18(3), 290-305.

Blake, David, Rossi, Alberto G., Timmermann, Allan, Tonks, Ian, & Wermers, Russ. (2013). Decentralized Investment Management: Evidence from the Pension Fund Industry.(Report). Journal of Finance, 68(3), 1133-1178.

Choy, Lin, & Officer. (2014). Does freezing a defined benefit pension plan affect firm risk? Journal of Accounting and Economics, 57(1), 1-21.

Goldhaber, D., & Grout, C. (2016). Which plan to choose? The determinants of pension system choice for public school teachers. 15(1), 30-54.

Gorham, Peter. (2002). Investment information for DC plan members: ... DC plan sponsors think they are plan members' first choice for investment information. Benefits Canada, 26(10), 45-47.

Holzmann, R., Palmer, E., & Robalino, D. (2012). Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World, Volume 1 Progress, Lessons, and Implementation. Washington: World Bank Publications.

Jovanovic, Andreadakis, & Schinckus. (2016). Efficient market hypothesis and fraud on the market theory a new perspective for class actions. Research in International Business and Finance, 38, 177-190.

Kadir Can Yalcin. (2010). Market Rationality: Efficient Market Hypothesis versus Market Anomalies. European Journal of Economic and Political Studies, 3(2), 23-38.

Magill, M., & Quinzii, M. (2010). A Comoment Criterion for the Choice of Risky Investment by Firms. International Economic Review, 51(3), 723-744.

Mark Nadler. (2009). Financial education can help employers' bottom lines.(Retirement Planning). Employee Benefit News, 23(7), 45.

Most, W., & Wadia, Z. (2015). Longevity plans: An answer to the decline of the defined benefit plan. Benefits Law Journal, 28(1), 23.

Steyer, R. (2011). Fund awaits ruling on hybrid plan switch. Pensions & Investments, 39(8).

Sun, Aw, Loxton, & Teo. (2017). Chance-constrained optimization for pension fund portfolios in the presence of default risk. European Journal of Operational Research, 256(1), 205-214.

Tetrick, L., Weathington, E., Silva, B., & Hutcheson, L. (2010). Individual Differences in Attractiveness of Jobs Based on Compensation Package Components. Employee Responsibilities and Rights Journal, 22(3), 195-211.

Webb, D. (2011). Pension Plan Funding, Technology Choice, and the Equity Risk Premium. Scandinavian Journal of Economics, 113(3), 493-524.

Zhang, D., Wu, T., Chang, T., & Lee, C. (2012). Revisiting the Efficient Market Hypothesis for African Countries: Panel Surkss Test with a Fourier Function. South African Journal of Economics, 80(3), 287-300.