Institutional Investment Essay Example | Topics and Well Written Essays - 2000 words - 1

Institutional Investment - Essay Example The discussion will, however, start by providing background information on the two plans. These plans are abstractly simpler and involve the employer (and in some cases the employee) making regular contributions to the retirement account of the employee. The amount of contributions is predetermined, usually a specified fraction of the salary. This fraction is, however, subject to alterations in the course of the employee’s career. In this plan, the both contributions are tax-deductible although the investment income accumulates tax-free. In most cases, the employee decides on his/her choice of account investment. This may include investing in stock markets, bonds or any security that pleases them. At retirement, the employee can either receive an annuity or a lump sum, and the size of this money depends on the value of the accumulated funds in the employee’s retirement account (Poterba et al., 2007). The employee bears the risk of their investment and thus the employer has no any extra obligation beyond contributing to their employee’s retirement pla n account. The valuation of defined contribution plans is simple and involves measuring the market value of the assets created in the retirement account. In most cases, the employee is guided in their personal financial planning by their defined contributions plan’s sponsor (Clark 1999). Unlike the defined contributions plan which focuses more on the value of retirement account’s created assets, defined benefits plan focuses on the flow of benefits received by the employee at retirement. Typically, a defined benefits plan uses the employee’s wage history and the years of service as the determinants of the value of the benefit (Huberman, Iyengar & Jiang 2007). Upon retirement, the employee receives a defined monthly amount that is guaranteed for their life and that of their spouse. In some cases, the plan allows room