I only get one shot at this? you wonder aloud. Martina, human resources manager at Covington State University, has just explained that newly hired assistant professors must choose between two retirement plan options. Yes, Im afraid so, Martina concedes. But you do have a week to decide.

Martina's explanation was that your two alternatives are (1) the states defined benefit plan and (2) a defined contribution plan under which the university will contribute each year an amount equal to 8% of your salary. The defined benefit plan will provide annual retirement benefits determined by the following formula: 1.5% years of service salary at retirement.

Its a good thing I studied pensions in my accounting program, you tell Martina. Now lets see. You say the state is currently assuming our salaries will rise about 3% a year, and the interest rate they use in their calculations is 6%? And, for someone my age, you say they assume Ill retire after 40 years and draw retirement pay for 20 years. Ill do some research and get back to you.

Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Hint: The calculations are greatly simplified using an electronic spreadsheet such as Excel. There are many ways to set up the spreadsheet. One relatively easy way is to set up the first few rows with the formulas as shown below, then use the fill down function to fill in the remaining 38 rows, and use the Insert: Name: Define: function to name column B n. Since contributions are assumed made at the end of each year, there are 39 years remaining to maturity at the end of 2024. Note that multiplying each contribution by (1.06)ⁿ, where n equals the remaining number of years to retirement, calculates the future value of each contribution invested at 6% until retirement.

End of Year	Years to Retirement	Salary	Contribution	Future Value at Retirement
2024	39	100,000	= C30.08	= D31.06^n
=A3+1	= B31	= C31.03	= C40.08	= D41.06^n

Based on this numerical comparison, which plan would you choose?

multiple choice

Defined contribution plan

Defined benefit plan

What other factors must you also consider in making the choice?

Note: You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.

check all that apply

Very often, defined contribution plans provide benefits only until you and/or your spouse dies with no benefits to other beneficiaries.

Greater uncertainty is associated with defined contribution plans, in general.

In a defined benefit plan, the employer is responsible for making up the difference when investment performance is less than expected.

Defined benefit plans pay benefits from retirement to death.

Assets accumulated under defined contribution plans are a fixed amount.