How do defined benefit plans typically manage investment risk?

Defined benefit plans manage investment risk primarily by pooling resources and managing funds collectively. This approach allows the plan to diversify its investment portfolio across a wide range of assets, which can help mitigate the risk associated with individual investments. By combining contributions from all participating employees and employers, the plan can leverage larger sums of money for investment purposes, resulting in greater collective bargaining power and the ability to invest in a more extensive range of investment options.

This collective management also gives the plan an opportunity to hire professional investment managers who possess expertise in selecting investments that align with the plan's objectives, ensuring that the growth of the fund is managed prudently. Consequently, the responsibility for investment performance and risk is primarily held by the plan itself, rather than being transferred to individual employees. This structure aligns with the fundamental characteristic of defined benefit plans, where the employer bears the responsibility for ensuring that adequate funds are available to pay promised retirement benefits, regardless of market fluctuations.

The other choices hint at different management types that do not align with the traditional defined benefit plan's structure. For instance, transferring investment risk to the employee typically characterizes defined contribution plans, where individuals bear the risk of investment outcomes. Adhering to regulatory guidelines is essential for all types of retirement plans but does not