{"id":2007,"date":"2019-10-01T13:29:00","date_gmt":"2019-10-01T13:29:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=2007"},"modified":"2026-03-08T10:21:59","modified_gmt":"2026-03-08T10:21:59","slug":"dc-db-pension-plans","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/dc-db-pension-plans\/","title":{"rendered":"DC and DB Pension Plans"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following best describes the investment risk of a DB pension plan?\",\n    \"text\": \"Which of the following best describes the investment risk of a DB pension plan?\\n\\nA. The employer assumes the investment risk.\\n\\nB. The employee assumes the investment risk.\\n\\nC. The employer and the employee share the investment risk.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. In a defined benefit (DB) pension plan, the employer assumes the investment risk because the employer must ensure that sufficient assets are available to meet the promised retirement benefits. If investment returns are lower than expected, the employer is responsible for making additional contributions to cover the shortfall.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Portfolio Management: An Overview (2025 Level I CFA\u00ae Exam \u2013 PM \u2013 Module 1)\",\n  \"description\": \"Master the CFA Level I Portfolio Management: An Overview. In this lesson you will learn the portfolio approach to investing, how diversification reduces total risk, the steps in the portfolio management process, key investor types and their needs, and an overview of the asset management industry including mutual funds, ETFs, hedge funds, and pooled products. Use this lesson as your foundation before Risk and Return Part I and II.\",\n  \"uploadDate\": \"2022-06-30\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/ILj5hT_N3TU\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=ILj5hT_N3TU\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/ILj5hT_N3TU\",\n  \"duration\": \"PT50M54S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/ILj5hT_N3TU?si=vn7WY1srMkO5kbSQ\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>Employees of both private and public companies often save and invest for retirement via defined contribution (DC) pension plans in which they assume the investment risk. In the case of a defined benefit (DB) pension plan, the responsibility and investment risk fall on the employer. It is up to the employer to provide the defined benefits to employees on retirement.<\/p>\n<h2><strong>Defined Contribution Pension Plan<\/strong><\/h2>\n<p>A Defined Contribution (DC) pension plan is an investment vehicle in which the amounts invested, or the contributions that the employee makes to the plan, are defined or specified, but the benefits are not predetermined. The objective of the pension plan is to accumulate wealth by investing a portion of wages while working to provide income during retirement. Unlike a Defined Benefit (DB) pension plan, where the retirement benefits are predetermined based on factors such as salary and years of service, a DC plan places the investment risk on the employee. The employee is responsible for ensuring that their contributions and investment growth are sufficient to provide the desired income upon retirement. The final retirement income in a DC plan depends on the contributions made, investment performance, and the choices made by the employee regarding investment options within the plan.<\/p>\n<h2><strong>Defined Benefit Pension Plan<\/strong><\/h2>\n<p>In a DB pension plan, the employer has an obligation to provide certain benefits to employees when they retire. The future benefit is specified or defined. The investment management of DB plans has to consider the timing of its future liabilities or cash flows by assessing the age of its plan members. If, for example, a DB pension plan has a lot of young members, the investment time horizon of the plan may be quite long. The plan investment manager may try to match the cash flow requirements of the plan with cash-flow-producing assets such as bonds. This checks the capacity of portfolio assets to offset portfolio liabilities.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following <em>best<\/em> describes the investment risk of a DB pension plan?<\/p>\n<p>A. The employer assumes the investment risk.<\/p>\n<p>B. The employee assumes the investment risk.<\/p>\n<p>C. The employer and the employee share the investment risk.<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>In a DB pension plan, the employer must ensure there are sufficient assets to match the future defined benefits payable to employees upon retirement.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Employees of both private and public companies often save and invest for retirement via defined contribution (DC) pension plans in which they assume the investment risk. In the case of a defined benefit (DB) pension plan, the responsibility and investment&#8230;<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7],"tags":[],"class_list":["post-2007","post","type-post","status-publish","format-standard","hentry","category-portfolio-management","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>DC vs DB Pension Plans | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Compare defined contribution (DC) and defined benefit (DB) pension plans, their structures, risks, and benefits for employees and employers.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/dc-db-pension-plans\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"DC vs DB Pension Plans | CFA Level 1 - 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