RETIREMENT PLANS Chapter 9. Employee... A retirement plan is often a cornerstone
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RETIREMENT PLANS Chapter 9. Employee... A retirement plan is often a cornerstone of a comprehensive benefits plan. The type of plan offered and the amount that the employer contributes can be valuable recruitment tools Careful plan design can create incentives that assist retention strategies. Many organizations provide a base contribution to such plans and offer a vehicle for employees to save for their own retirement. The two main types of retirement plans are the defined benefit plan and the defined contribution plan. Exhibit 9.5 enumerates the differences between these two types and also presents a hybrid of the two. The IRS categorizes retirement plans as qualified or nonqualified. Savings plans that allow staff to contribute to their own retirement are called tax-deferred plans. Each of these five types of plans is explained in the sections that follow Go to Chapter 9. Employee Benefits 234 Vignette 235 Introduction ExHIBIT 9.5 236 Brief Historical Background Major Federal Legislation Mandatory Benefits Voluntary Benefits Retirement Plan Category What Does It Do? Types Within the Category Advantages Disadvantages Retirement Plans Defined benefit Provides a retire Finalaerage Benefits based Not as portable 237 ment benefit payable to the employee on attainment of salary age and years ofDollarstimes service, based on a percentage of salary during working years; usually payable monthly for the lifetime of retiree and/or spouse on years on the job, encourag- salary as defined con- tribution plan Cannot bormow against the plan Career average ng long-term 241 Benefits based on salary, Us Assets not ally at the high directy allocated years of service 242 to the participant until retirement est level 243 Health Insurance Employer must fund account based on future amounts payable Other Health and Welfare Benefits Payable to retiree in eitherquali- fied joint and survivor annuity or a life annuity 256 Retirement Plans Employer pro Profit sharing Employeegenr Final balance vides a coni 401k, 401a) bution to an account based Employee stock on the em- ployee's current Defined contribution 259 Designing a Benefits Plan ally allowed to direct the in account is based on the performance of the market and 262 Summary option plans Assets are allcat the selectedExplanation / Answer
Defined benefit:
While this plan primarily focuses on retaining people for a longer duration, it may adversely impact the organisations balance sheet because the sum is payable for a lifetime irrespective of financal position
As there is no stock sharing option, employee may not own up business objectives/goals so, this could deter competetiveness
Defined contribution:
Employee stock option would associate people with the business. Tax savings would act as a bonus.
Returns are directly proportional to risk because final savings are based on market performance. Employee would have to scope to make good compounding returns.
Hybrid:
It aspires to consolidate both the models however, it is not really clear to assess the value add.
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