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Merging Current Retirement Plans at Company Y: Memo to CEO
In the wake of the recent merger, employees of Company Y are understandably anxious about the decision to create a single, unified retirement benefits plan for all employees. One segment of the company has a defined contribution plan, in which employees contribute to the plan with a portion of their salary, which is then matched by the company. The employees with this plan have sometimes benefited from the fact that a defined contribution plan can change in value, based upon market circumstances. "There is no way to know how much the plan will ultimately give the employee upon retiring. The amount contributed is fixed, but the benefit is not" (Defined contribution, 2011, Investopedia).
Recent market uncertainty has caused some employees to question the value of such a plan, given that many people nationwide lost a substantial part of their retirement savings during the most recent financial crisis. Still, some employees like the idea of being able to control where their investments may lie: "Balances accrue[d] in [defined contribution] DC plans belong to individual employees, who direct the investments and bear the risk of fluctuating asset returns" (Retirement plans, 2009, Job employment guide). Managers like the fact that the company's contribution is fixed, and they are not required to 'make up' for any deficits in retirement funds. Some risk-seeking employees are attracted...
Defined benefit contribution plans offer far more stability for the employee, in terms of the fund's rate of return. In these funds, an employee's rate of return or payout is only "somewhat dependent on the return of the invested funds" rather than entirely dependent, as in the case of a defined contribution plan (Defined benefit, 2011, Investopedia). If there is an unexpectedly paltry rate of return, the company will have to "dip into the companies' earnings in the event that the returns from the investments devoted to funding the employee's retirement result in a funding shortfall" (Defined benefit, 2011, Investopedia).
For employees with little experience in investment, defined benefit funds provide the advantage of allowing the company to entirely manage their retirement plan. But undeniably the greatest benefit to the employee is the simple fact that employees are guaranteed a "specific monthly benefit at retirement. This monthly benefit can be an exact dollar amount, or be calculated through a formula that considers a participant's salary and years of…
References
Defined benefit. (2011) Investopedia. Retrieved February 3, 2011 at http://www.investopedia.com/terms/d/definedbenefitpensionplan.asp
Defined contribution. (2011) Investopedia). Retrieved February 3, 2011 at http://www.investopedia.com/terms/d/definedcontributionplan.asp
Retirement plans. (2009). Job employment guide. Retrieved February 3, 2011 at http://www.job-employment-guide.com/retirement-plans.html
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