Which of the following statements regarding defined contribution plans is FALSE?

• A. The employer's obligation is limited to making specified contributions to the plan.
• B. The employer guarantees a specific retirement benefit amount to the employee.
• C. Plan assets are typically held in a separate trust for the benefit of employees.
• D. The employee bears the investment risk associated with the plan assets.

Answer: (B)

Verified step by step guidance

1. Understand the concept of a defined contribution plan: In a defined contribution plan, the employer contributes a specified amount to the employee's retirement account, but does not guarantee the final benefit amount. The retirement benefit depends on the investment performance of the plan assets.
2. Analyze the employer's obligation: The employer's obligation is limited to making the specified contributions to the plan, and they do not guarantee a specific retirement benefit amount. This is a key characteristic of defined contribution plans.
3. Examine the role of plan assets: Plan assets are typically held in a separate trust for the benefit of employees. This ensures that the funds are safeguarded and used solely for the employees' retirement benefits.
4. Evaluate the investment risk: In a defined contribution plan, the employee bears the investment risk. This means that the final retirement benefit depends on how well the investments perform, and the employer is not responsible for any shortfall.
5. Identify the false statement: Based on the characteristics of defined contribution plans, the false statement is 'The employer guarantees a specific retirement benefit amount to the employee,' because the employer does not guarantee the final benefit amount in such plans.