Who bears the risk of the investment portfolio in a defined benefit plan?

In a defined benefit plan, the sponsoring employer bears the investment risk associated with the portfolio. This means that the employer is responsible for ensuring that there are sufficient funds to meet the future obligations to retirees, regardless of how the investments perform.

If the investment portfolio underperforms, the employer must still fulfill the promise made to employees regarding their retirement benefits. This can result in the need for the employer to contribute additional funds to the plan to meet these obligations. In contrast, employees and beneficiaries receive guaranteed benefits based on the plan formula, and they are not directly impacted by the performance of the underlying investments.

The firm managing the portfolio may have some responsibility related to investment strategy and performance, but the ultimate risk of ensuring that the retirement benefits are paid rests with the sponsoring employer. An actuary plays a role in valuing the obligations and determining funding levels but does not bear the risk of the investments themselves.