Firms which are aggressive and willing to take risks tend to favor which type of pension plan?

Firms which are aggressive and willing to take risks tend to favor which type of pension plan?

• A. Defined contribution plans
• B. Defined benefit plans
• C. Hybrid plans
• D. Cash balance plans

Answer: (A)

This item centers on how a firm’s appetite for risk shapes pension design. In a defined contribution plan, the employer’s contributions are set, but the eventual retirement benefit depends on investment performance. The investment risk shifts to the employee, and the company faces more predictable, controllable costs rather than a guaranteed future payout. That flexibility and the lack of a fixed long-term funding obligation appeal to aggressive firms that want to avoidCommitment of large, uncertain pension liabilities. By contrast, a defined benefit plan promises a specific retirement benefit and places investment and longevity risk on the employer, which can create funding volatility and long-term financial commitments—something a risk-taking firm typically wants to avoid. Cash balance plans blend features but still retain some guaranteed aspects, making them somewhat less aligned with a pure aggressive stance. So, the defined contribution plan is the most consistent with an aggressive, risk-tolerant approach.

This item centers on how a firm’s appetite for risk shapes pension design. In a defined contribution plan, the employer’s contributions are set, but the eventual retirement benefit depends on investment performance. The investment risk shifts to the employee, and the company faces more predictable, controllable costs rather than a guaranteed future payout. That flexibility and the lack of a fixed long-term funding obligation appeal to aggressive firms that want to avoidCommitment of large, uncertain pension liabilities.

By contrast, a defined benefit plan promises a specific retirement benefit and places investment and longevity risk on the employer, which can create funding volatility and long-term financial commitments—something a risk-taking firm typically wants to avoid. Cash balance plans blend features but still retain some guaranteed aspects, making them somewhat less aligned with a pure aggressive stance. So, the defined contribution plan is the most consistent with an aggressive, risk-tolerant approach.