FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans
Which feature is characteristic of a DC plan rather than a DB plan?
A DC plan gives each member an individual account whose value depends on contributions and investment returns. Formula-based benefits, sponsor-borne longevity risk and guarantee fund protection are features of DB plans, not DC plans.
- ABenefits are determined by a formula based on salary and service
- BThe sponsor faces longevity risk on retirees
- CEach member has an individual account whose balance depends on contributions and returnsCorrect
- DThe plan is typically insured against sponsor default by a guarantee fund
Explanation
DC plans maintain individual accounts, and the retirement benefit is whatever the account balance supports. Formula benefits, sponsor longevity risk and guarantee-fund insurance relate to DB plans.
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