CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

A defined contribution pension plan:

I. disburses benefits based on the returns on the fund's investments.
II. promises to pay retirees a specific income stream.
III. pays defined benefits for a certain period after retirement.
Correct Answer: I

In a defined contribution plan, the employee makes definite contributions to the pension plan from the regular salary. Investment of these contributions is at the discretion of the employee and the size of the benefits paid out depends upon the total contributions made and the fund performance. Thus, in this plan, the risk of pension plan performance is borne by the employee and not the employer.

User Contributed Comments 6

User Comment
Will1868 In reality however the withdrawl's from 401(k)'s and other defined contribution plans are as much a funtion of the owners need for that money as it is the return in the fund. For instance if I need 40k/yr in retirement to live on I will take it from my 401(k) if I have to other source - even if that means depleting it faster than the growth of my investments would support.
ehc0791 None of them is defined contribution plan.
jhmorris The answer given is correct. Since a defined contribution plan is owned and directed by the employee, the benefits received by the employee are directly related to the investment performance of the account, rather than a guaranteed income stream from their employer.
AusPhD jhmorris is correct
davidt876 damn myasking... the question is explicitly asking about defined contribution plans..

will1868, even if your withdrawals > fund earnings, you are still benefitting from current and past investment growth in the fund
blackyosh1 according to investopedia, in a defined contribution plan, the employee makes contributions which is matched by employers and the employee has discretion on how to invest and is liable for whether or not benefits are paid out.
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