Merging Current Retirement Plans at Company Y:

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 to the fact that their ability to profit from an upturn in the market is seemingly infinite: they also point to the fact that the stock market has generally increased in value over the long-term, and investing in retirement is all about having a long-term focus. The other type of retirement benefits plan offered by the company is that of a defined benefit plan. 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 service" (Retirement plans, 2009, Job employment guide). In short, the company bears the risk, rather than the employee.

The recent financial crisis had had an impact in terms of the way that these retirement funds are perceived. Managers are worried that there may be a need to dip into possibly scarce company revenue, if there is a financial downturn, to pay for a shortfall.

Employees who have had defined benefit plans and appreciated the security derived from them are anxious that this cushion may be taken away from them, given that they have structured their future life plans around the expectation that they will have some type of guaranteed retirement income.

Furthermore, employees covered under current defined benefit plans argue that it is unfair to force them into a defined contribution plan, given that they selected their jobs at least partially for the certainty and stability provided by the option of having a defined benefit plan.

Defined benefit plans reward employees who have spent fairly long amount of time at the company, even their entire working lives, versus employees who simply 'come and go.' Work attrition and turnover is of concern at any company, but particularly after a merger, and the added security for the company of retaining high-quality employees through defined benefits plans cannot be minimized. From the company's perspective, it might seem to be a uniformly salutary idea to simply do away with defined benefits plans.

However, having a potentially attractive and stable retirement plan can often draw higher-quality workers to the company. The structure of defined benefit plans also rewards company loyalty. "The payouts made to retiring employees participating.