Which statement best describes the purpose of actuarial valuations for funded defined benefit plans?

Which statement best describes the purpose of actuarial valuations for funded defined benefit plans?

• A. They measure plan investment performance.
• B. They set employee eligibility and vesting rules.
• C. They determine funded status, required employer contributions, and sensitivity to actuarial assumptions.
• D. They determine the plan's administrative budget.

Answer: (C)

Actuarial valuations for funded defined benefit plans focus on the financial health of the plan and how much the sponsor must contribute. They determine the funded status by comparing the plan’s assets to the present value of the benefits earned to date, highlighting whether the plan is adequately funded or needs additional funding. They also specify the required employer contributions to move toward a target funding level, taking into account how benefits will be paid in the future and how any shortfall should be amortized. In addition, they show how sensitive the funded status and contributions are to key assumptions—such as the discount rate, mortality, and salary growth—so stakeholders can understand the financial risk and potential variability in funding needs. This combination—funded status, required contributions, and sensitivity to assumptions—is precisely what actuarial valuations provide. Investment performance is assessed separately, plan design decisions like eligibility and vesting lie outside the valuation, and administrative budgeting isn’t the valuation’s primary purpose.

Actuarial valuations for funded defined benefit plans focus on the financial health of the plan and how much the sponsor must contribute. They determine the funded status by comparing the plan’s assets to the present value of the benefits earned to date, highlighting whether the plan is adequately funded or needs additional funding. They also specify the required employer contributions to move toward a target funding level, taking into account how benefits will be paid in the future and how any shortfall should be amortized. In addition, they show how sensitive the funded status and contributions are to key assumptions—such as the discount rate, mortality, and salary growth—so stakeholders can understand the financial risk and potential variability in funding needs. This combination—funded status, required contributions, and sensitivity to assumptions—is precisely what actuarial valuations provide. Investment performance is assessed separately, plan design decisions like eligibility and vesting lie outside the valuation, and administrative budgeting isn’t the valuation’s primary purpose.