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Answer: Funds contributed to the pension plan are kept in separate accounts for each employee.
**Correct Answer: A** **Explanation:** A is correct. Funds contributed to defined contribution plans are kept in separate accounts for each employee. B is incorrect. The risk of not having enough retirement savings is borne by the employee. C is incorrect. The employee determines how the funds will be invested. D is incorrect. The present value of pension obligations is assessed each year in defined benefit plans to determine the amount the employer is required to contribute to the pension plan. There is no corresponding calculation in defined contribution plans. **Learning Objective:** Describe defined benefit plans and defined contribution plans and explain the differences between them. **Reference:** Global Association of Risk Professionals, Financial Markets and Products (New York, NY: Pearson). Chapter 2. Insurance Companies and Pension Plans
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A compensation analyst at a consulting firm is comparing defined benefit pension plans and defined contribution pension plans offered by a company to its employees. The analyst prepares a detailed analysis of the structures and characteristics of these pension plans. Which of the following is correct regarding defined contribution pension plans?
A
Funds contributed to the pension plan are kept in separate accounts for each employee.
B
An employee's risk of not meeting a minimum retirement benefit level is assumed first by the employer, then by government-sponsored entities.
C
The company determines how the funds will be invested so that the maturity of the plan's assets matches the maturity of its obligations.
D
The present value of pension obligations is estimated each year to determine the employer's contribution.