Certified Plan Sponsor Professional (CPSP) Practice Exam

Why do some employers favor hybrid plans over traditional defined benefit plans?

1. Lower overall contribution rates

2. Higher investment returns

3. More predictable employer funding obligations

4. Greater employee satisfaction

The correct answer is: More predictable employer funding obligations

Employers favor hybrid plans over traditional defined benefit plans primarily due to the predictability of employer funding obligations. Hybrid plans often combine features of both defined benefit and defined contribution plans, allowing for more stable and manageable funding requirements. In a traditional defined benefit plan, the employer bears the investment risk and must ensure that promised benefits can be funded, which can lead to significant fluctuations in funding obligations based on market performance and demographic changes. In contrast, hybrid plans often utilize mechanisms that provide a clearer view of future liabilities and funding needs. This predictability enables employers to better plan their budgets and allocate resources accordingly. While other options like lower overall contribution rates or employee satisfaction can be relevant factors, they do not compare to the primary concern of funding predictability that employers have when considering their long-term financial commitments and planning. This reliability allows organizations to navigate economic changes and maintain more sustainable benefit offerings.