Question

Pension data for fahy transportation incorporated include the following: ($ in millions) discount rate, 6% expected return on plan assets, 9% actual return on plan assets, 10% projected benefit obligation, january 1$ 880 plan assets (fair value), january 1850 plan assets (fair value), december 31900 benefit payments to retirees, december 3181 required: assuming cash contributions were made at the end of the year, what was the amount of those contributions? note: enter your answer in millions (i.e., 10,000,000 should be entered as 10).

Answer 1

The scenario highlights the long-term financial impact of administrative fees on investments and the importance of understanding pension plan types, especially the distinction between defined benefits and defined contribution plans in relation to inflation and purchasing power over time.

Step-by-step explanation:

When assessing pension plans and investment returns, it is crucial to consider various factors such as administrative fees, expected returns, and the effect of inflation over time. In the scenario provided, Alexx and Spenser each invest $5,000, with Alexx earning a direct return of 5% while Spenser earns a reduced return of 4.75% due to the administrative fee of a retirement fund. After 30 years, this difference in returns, although seemingly minor, compounds significantly.

Moreover, we must understand that retirees who rely on defined benefit plans with fixed incomes can face substantial losses in their purchasing power over time due to inflation. In contrast, retirees with defined contribution plans like 401(k)s are better protected from inflation since they can earn real rates of return on their investments.