In which of the following plans does the company assume all of the investment risk?ADefined benefitBDefined contributionCSimplified Employee Pension (SEP)DProfit-sharing
A: Defined benefit- The company assumes the responsibility for making sure money will be available to fund a pension for retiring workers when a defined benefit plan is in place.
The correct answer is A) Defined benefit.
A defined benefit plan, also known as a pension plan, is a retirement plan in which the employer guarantees a specific retirement benefit amount for the employee based on factors such as years of service and salary history. In this plan, the company assumes all of the investment risk, and must ensure that they have enough funds to pay out the promised benefits to their employees. This includes making up any shortfalls if the plan’s investments do not perform well.
In contrast, a defined contribution plan, such as a 401(k) plan, places the investment risk on the employee to manage their own retirement funds. A simplified employee pension plan (SEP) is a type of defined contribution plan where the employer contributes to an individual retirement account (IRA) set up for each employee. In a profit-sharing plan, the employer shares a percentage of the company’s profits with the employees, with the investment risk predominantly on the employee to manage their own funds.
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