Essay about BP Amoco Case

1325 Words Nov 6th, 2014 6 Pages
1. In a defined-contribution (DC) pension plan, the employee or employer, or both, make regular contributions to the plan. In the US, employees typically set aside a predetermined percentage of their earnings which is deposited to the plan and the employer will match that contribution. Ultimately, the amount of money available to the individual upon retirement is determined by the performance of their investments. Each employee retains the option to choose how to diversify their investments, while the employer will typically provide a “default allocation” option. The options available are generally very varied, and includes a number of index funds and actively managed mutual funds.
In a defined-benefit (DB) pension plan, the retiree is
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This made more than 150 mutual funds available to the participants.
3. We recommend that BP Amoco offers a combination of index funds, mutual funds, and company stocks to their employees. The cost of these different investment options should follow the price-discrimination approach and the company should cover only the cost of core investment funds, leaving the cost of mutual funds to be covered by the plan participants. We have decided to offer several index funds because they are low-cost and well diversified, meaning that they carry low risk. In addition, mutual funds should be included because they simplify the merging of BP America’s and Amoco’s pension plans. Even though mutual funds have a higher cost and carry with them an increase in liability for BP Amoco, not including mutual funds would mean liquidating or freezing existing investments in mutual funds for BP America’s employees. The mutual funds offered should be evaluated based not only on the alpha, but also on the Sharpe Ratio. It is important to include the Sharpe Ratio in our analysis because it tells us whether the high returns only came as a result of higher risk, or if they were the result of smart investment decisions made by mutual fund managers. Although investing in company stock would mean that participants would have to bear all the risk, BP Amoco should offer company stock to its

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