Question

Which is true about pension plans?

1. They are subject to mandatory funding.
2. Up to 100% of the funds can be invested in employer securities.

a.) 2 only
b.) both 1 and 2
c.) neither 1 nor 2
d.) 1 only

Answer 1

Defined benefits plans are being replaced by defined contribution plans like 401(k)s which are portable, have tax-deferred contributions, and can offer investment returns that counteract the effects of inflation.

Step-by-step explanation:

Traditional pensions, known as defined benefits plans, offer a fixed nominal dollar amount per year at retirement and do not typically increase over time, leading to potential loss of buying power due to inflation. In contrast, defined contribution plans, such as 401(k)s and 403(b)s, have become more prevalent.

With these plans, both employer and employee contribute a fixed amount to the retirement account regularly, which the employee then invests in a variety of investment vehicles. These contributions are tax-deferred and the plans are portable, so they can be taken to a new employer. The investment returns can help retirees keep up with inflation, avoiding the erosion of purchasing power that can occur with fixed pension benefits.