Varieties of Benefits Plans
Most private organizations now use a defined contribution plan, one that many believe is not as advantageous or appealing to employees as a defined benefit program. Using the week’s assigned resources:
- Discuss the principle reasons that organizations have moved to defined contributions plans from defined benefit plans, and the specific impact to employees.
- Analyze how organizations might enhance the benefits of defined contribution plans to make them more attractive to employees without causing the organization unwanted issues, including fiscal challenges, since that was an original intention of moving from the defined benefit program.
Respond by Day 5 to two or more of your colleagues’postings in one or more of the following ways:
• Ask a probing question.
• Share an insight from having read your colleagues’ postings.
• Offer and support an opinion.
• Validate an idea with your own experience.
• Make a suggestion.
• Expand on your colleagues’ postings.
Classmate 1: (Erin)
” As of late, organizations have shifted from defined benefit plans, or your standard pension plans, to defined contribution plans, such as 401(k) plans. With defined benefit plans, employers promise to pay out a certain amount of money to an employee upon retirement based upon their age, years with the company, and other such factors. Defined contribution plans, on the other hand, involve employees putting part of their earnings aside throughout their employment in order to save up for retirement. Most companies are required to match or contribute a certain percentage of what the employee puts in to the defined contribution plans.
This shift from defined benefit plans to defined contribution plans has occurred for many reasons. The primary reason for this shift is that defined benefit plans can be incredibly costly and burdensome to the organization (Smith, 2004). With defined contribution plans, employees are tasked with tracking and managing their own plans, which takes the administrative burden off of the organization. Typically, the employee will choose their contribution for the year at the beginning of the year and the company’s match-amount is automatic and fixed for that year. This also tends to be more cost-effective for the organization because they are only putting a percentage in to the plan, rather than footing the entire bill, as they would with defined benefit plans.
One major issue with utilizing defined contribution plans over defined benefit plans is that, in most cases, defined contribution plans can be transferred from one company to another. An employee may find a company that will match their contribution to their 401(k) at a higher percentage than their current organization. This could result in an employee leaving a company so that they may obtain better benefits. On the other hand, defined benefit plans would encourage employees to stay in one company for the long-haul as the company is contributing 100% of the funds for this plan. If an employee were to go to another company, any moneys accrued with the defined benefit plan would not follow them. Thus, the longer an employee was with a company utilizing defined benefit plans, the less likely they would be to “jump ship.”
For many employees, defined contribution plans can seem quite daunting. Choosing a percentage to contribute of their current earnings can be difficult, as they want to find balance between current earnings and their future retirement savings. Also, many individuals are not familiar with the process of investing and may just leave it to a third party to select where to invest their retirement money. This can seem risky to some individuals as they are uncertain whether they are making the best investments. I think defined contribution plans can be improved for the employees by offering consultative services from a third-party investor to work with them on gaining knowledge of investment and helping them make their own choice of investments. This would prevent any unnecessary administrative burden on the organization, while also keeping the financial obligation relatively low. Many investment firms will offer such consultative services with little to no financial compensation required of the organization. This would help retain employees as it will help them to feel confident that they are getting the most out of their defined contribution plan under their current employer. This helps avoid unnecessary costs that would go along with recruitment and on-boarding of new employees at the potential loss of other employees who can find a more suitable defined contribution plan elsewhere.”
Classmate 2: (Barbie) –
“As employees search within the work market, it is a difficult task when comparing benefit packages offered by organizations. Some may assume all are equal in benefits offered or go under the assumption all organizations offer equal or similar benefits. In fact, some places do not offer a single benefit even though the salary may seem quite reasonable. However, regardless if the potential employee is planning to stay within the organization through retirement or just utilizing the organization as a stepping stone until another offer comes along, there are some factors to consider when an organization offers benefit packages. Defined benefits and defined contributions are two vastly different benefits and could affect how one would plan to retire.
Defined benefits are a package which offers a pension plan from within the organization. The organization contributes funding based on standards of Employee Retirement Income Security Act (ERISA). As explained within the article by Society for Human Resource Management, ERISA was enacted in 1974; which became costly to organizations contributing funds to the employees because of increased wages accrued as well as the employees working for substantial amount of years within the organization (2010).
Defined contribution plans came forth after organizations found this type of plan saves out-of-pocket costs of investments of employees by offering such investments to the employees as 401(k). However, not all organizations match the dollar amount an employee invests. Actually, organizations can vary on the contributions for the employees. Although some may match, others may only contribute a small percentage of the employee investment.
While organizations become competitive in acquiring employees, the varied difference of contributions to defined contribution plans can become more attractive by offering other voluntary benefits. Voluntary benefits, as a rule, cost the organization very little. The premise of voluntary packages is to offer group discounts to the organization and appeal to the employees for such items as insurance for automobiles, cancer, and pets. Packages may also include discounts for banking, purchasing items for personal life such as automobiles or vacation packages (Atkinson, W., 2009).
Recently I had an interview with an organization. Everything was going well during the interview process including my salary requirements. I felt as if I nailed it and I am as good as in! However, when I inquired what benefit packages are offered, I was told they do not have a benefit package for employees. I was very upfront by thanking for the time for the interview; however, this was a deal breaker. After over a week from this interview, I question if I had requested a higher salary to compensate for the lack of any benefit packages offered if the organization may have met my higher salary requirement.
The recent interview led me to reflect if the company at least offered a defined contribution plan along with my higher salary requirement to offset medical benefits. I would consider the position and investing in the 401(k); regardless of portion of contribution by the organization. Over 15 years ago I had to withdraw and close out my 401(k) due to a natural disaster and desperately needed the funding. I was very happy I made the investment within the organization and participated what was described as a ‘safe plan’. I did not invest aggressively; rather I invested proportionately regardless of how the market was trending. Although I never planned to use the investment prior to retirement, I am glad I did not leave that money on the table since the organization I was employed helped contribute to an untimely matter for which the money invested was very much needed.
References:
Atkinson, W. (2009). Filling in around the edges. Click for more options HRMagazine, 54(11), 55–58.Filling In Around the Edges. HRMagazine, 54(11) by William Atkinson. Copyright 2009 by the Society for Human Resource Management. Used by permission of the Society for Human Resource Management via the Copyright Clearance Center.
Society for Human Resource Management. (2010) Introduction to the human resources discipline of employee benefits. Retrieved from PDF. Introduction to the human resources discipline of employee benefits PDF.”
