Lesson 3 of 7 · 13 min
Individual investors and DC versus DB pension plans
Individual investors have goals that vary person to person and often save through defined contribution plans, where the employee carries the investment risk, whereas in a defined benefit plan the employer promises the pension and carries the funding risk.
In short
- Individuals invest for short-term goals (education, a house, a car, a business) and, above all, for retirement.
- Needs depend on wider circumstances: job prospects, home ownership, a cash reserve and insurance come before long-term investing.
- In a defined contribution (DC) plan, the account is in the employee's name, funded by employee and often employer, and the employee bears investment and inflation risk.
- In a defined benefit (DB) plan, the sponsor promises a specified retirement benefit and the employer bears the funding risk.
- Sponsors increasingly prefer DC plans (lower cost and risk for the company), so DB plans are losing share, though they remain large investors.
- Asset managers reach individuals directly or through intermediaries; high-net-worth clients want customised solutions plus tax and estate planning.
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