Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

In a defined benefit plan, who bears the investment risk?

1. Employee

2. Employer

3. Plan administrator

4. Investment advisor

The correct answer is: Employer

In a defined benefit plan, the employer bears the investment risk. This type of retirement plan guarantees a specified benefit upon retirement, which is typically determined by a formula based on factors such as salary and years of service. The employer is responsible for ensuring that there are sufficient funds to meet these future obligations, regardless of the investment performance of the plan's assets. The employer must manage the contributions to the plan and the investment of those funds to ensure that the promised benefits can be paid out. If investment returns are lower than expected, or if there are higher-than-anticipated payouts, the employer is required to cover the shortfall. This distinguishes defined benefit plans from defined contribution plans, where the employee assumes the investment risk, as their retirement benefits depend on the performance of their individual accounts.