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

Who is primarily responsible for bearing investment risk in a defined benefit plan?

1. Plan participant

2. Insurance company

3. Investment firm

4. Employer

The correct answer is: Employer

In a defined benefit plan, the employer is primarily responsible for bearing the investment risk. This means that the employer guarantees a specified benefit amount to employees upon retirement, usually based on a formula that considers salary and years of service. Because the employer is committed to providing this benefit regardless of the performance of the investments that fund the plan, they must ensure that there are sufficient assets to meet future obligations, regardless of whether the investments perform well or poorly. This structure contrasts with defined contribution plans, where the investment risk lies with the employee, as their retirement benefits depend on the performance of their own individual accounts. In a defined benefit plan, if the investments underperform, the employer has to make up the difference to fulfill the promised benefits to retirees. This responsibility places the investment risk squarely on the employer’s shoulders.