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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Retirement Planning Basics

Vikram, 45, has an employer-provided defined benefit pension and also invests in a defined contribution scheme. Which statement correctly distinguishes the two?

In a defined benefit scheme the benefit is fixed by a formula such as salary and years of service, so the employer bears the investment risk. In a defined contribution scheme the employee bears it, as the benefit depends on accumulated returns.

  1. AIn a defined contribution scheme the employer guarantees the final benefit amount
  2. BIn a defined benefit scheme the investment risk is borne mainly by the employerCorrect
  3. CIn a defined benefit scheme the benefit depends solely on market returns of the employee's account
  4. DBoth schemes place investment risk entirely on the employee

Explanation

In a defined benefit plan the benefit is set by a formula (such as salary and service), so the sponsor bears investment risk. In a defined contribution plan, the contribution is fixed and the employee bears the market risk, with the benefit depending on the accumulated corpus.

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