Stan Smith, a portfolio manager at ABC Corporation, manages his company's defined benefit plan. The plan has been underfunded for most of the past year, and Smith is meeting with Don Denman, ABC's CFO, to discuss possible ways to erase the liability shortfall.

During the meeting, Smith and Denman make the following comments:

#1: Smith proposes that the plan should increase the value of its assets by investing in riskier securities. Currently, the plan invests mostly in investment grade bonds and large cap stocks. Smith firmly believes that small cap stocks will help bring the fund to fully funded status.

#2: Denman is not confident that shifting to riskier securities will guarantee an increase in pension asset values. The company has a high debt ratio, and he believes that necessitates a more risk averse stance.

#3: Smith tells Denman that the high correlation of pension asset returns with the firm's operations and states that the high correlation increases the ability to take risk by increasing predictability and diversification.

#4: Denman disagrees, suggesting that a firm's high ratio of active to retired lives reduces the ability to take on more risk.

Smith and Denman hold further discussions, and return with the following solutions:

#5: Add an option to the plan that will allow participants to retire five years earlier than currently permitted at a 15% reduction in the value of the benefit payout.

#6. Adopt an asset-only perspective to manage the pension plan, allowing for increased risk tolerance and a higher rate of return as compared to an asset/liability management perspective.

#7. Freeze the plan. All new employees will participate in a new defined contribution plan where employees can select from a list of investment alternatives that will range from conservative to aggressive.

Each item is independent and is to be considered in isolation, as if it is adopted and no other changes are made.

A. Regarding Smith's comment #1 and Denman's comment #2, is Smith correct/incorrect? Is Denman correct/incorrect? Explain your answer.

B. Regarding Smith's comment #3 and Denman's comment #4, is Smith correct/incorrect? Is Denman correct/incorrect? Explain your answer.

C. If the plan adopts the early retirement provision in #5, does the plan's liquidity needs increase/decrease/no change and surplus increase/decrease/no change? Explain your answer.

D. If #7 is adopted and most plan participants choose more aggressive assets than those in the pension plan portfolio, risk for the sponsor (ABC Corp) increases/decreases/no change? Explain your answer.