As a consultant to a states underfunded pension fund, you have been asked to search for solutions to prevent underfunding in the future.

1. One explanation for the underfunding of a defined-benefit plan is that the economy was weak recently, so financial markets were weak, and this caused the underfunding. If so, the underfunding may not be a problem in the future. Do you think this explanation is sufficient and there is no need to search for an alternative explanation and solution? Explain.
2. One possible solution is for the states defined-benefit plan to be converted into a defined-contribution plan. Explain why this may or may not be a viable solution to the problem.
3. Some state workers prefer a defined-benefit plan because they are afraid that they will make poor investments if they are forced to manage their own funds (as they would if they had a defined-contribution plan). Is that a sufficient reason to force a state to remain on a defined-benefit plan?
4. (Extra credit). Some defined benefit pension have been subject to abuse and some managers have gone to prison for their illegal activities. Can you cite and any particular case where this happened and explain why it did?