In defined benefit plan, employees assume the risks associated with changes in inflation and interest rates.Question 7Answera.FALSEb.TRUE

Understanding Defined Benefit Plans

In a defined benefit plan, the employer guarantees a specific payout to employees upon retirement, which is usually based on factors such as salary history and duration of employment. The investment risk and the associated changes in inflation and interest rates are primarily borne by the employer, not the employees.

Analysis of the Statement

1. Risk in Defined Benefit Plans:

   • The employer is responsible for ensuring that there are sufficient funds to meet the promised payouts, regardless of economic fluctuations.

2. Implication for Employees:

   • Employees do not assume the financial risk in these plans; instead, they receive a predetermined benefit, which means their retirement income is less volatile compared to defined contribution plans, such as 401(k)s, where the employee bears investment risk.

Final Answer

The correct answer to the statement is a. FALSE, as the risk associated with changes in inflation and interest rates is assumed by the employer in a defined benefit plan, not the employees.