Explanation

Let's analyze each statement:

A. Defined benefit plans typically have a low risk tolerance

• This is incorrect. Defined benefit plans actually tend to have higher risk tolerance because the sponsor (employer) bears the investment risk and must make up any shortfalls. They often invest in riskier assets to achieve higher returns and reduce funding requirements.

B. Defined contribution plans typically have a high risk tolerance

• This is incorrect. Defined contribution plans typically have lower risk tolerance because the investment risk is borne by the participants (employees). Participants are often more conservative with their retirement savings and may choose lower-risk investment options.

C. The sponsor of a defined benefit plan specifies the obligation owed to participants

• This is correct. In a defined benefit plan, the sponsor (employer) promises specific benefits to participants upon retirement, typically based on factors like salary history and years of service. The sponsor bears the investment risk and must ensure sufficient funds are available to meet these specified obligations.

Key Differences Between Defined Benefit and Defined Contribution Plans:

Therefore, statement C is the most accurate description of pension plans.