In a defined benefit retirement plan, who bears the primary investment risk?

• A. Employee bears risk
• B. Plan administrator bears risk
• C. Government bears risk
• D. Employer bears risk

Answer: (D)

In a defined benefit plan, the benefit is set by a formula (based on salary, years of service, etc.), and the employer promises to pay that amount. Because the benefit is fixed, the sponsor must fund the plan to meet those promised payouts regardless of how the plan’s investments perform. If investment returns are poor, it’s the employer who fills the shortfall to ensure the promised benefits can be paid. The plan administrator handles the investments, but does not bear the investment risk—the employer does. That’s why the primary investment risk rests with the employer.