ERISA Retirement Plan Proposal: DB, DC, and Hybrid Options

Overview of Retirement Planning and ERISA

TO: Management Board
FROM: HR Strategic Planning
RE: XYZ Corporation Retirement Planning Options

You have asked that we prepare a proposal describing retirement plans we can offer, all based on the Employee Retirement Income Security Act of 1974 (ERISA). We have outlined two proposals for your review that we believe to be viable given our business sector, economic situation, and recruitment and retention goals. In addition, you will find a Marketing Communications Plan that will allow us to roll out whichever plan you select, communicate that plan to employees, and more effectively manage enrollment.

We know that fewer and fewer companies are offering retirement benefits. In general, this is due to a number of factors. Many employees do not stay with a company long enough to realize retirement benefits, and those who do are often unwilling to participate in company-sponsored programs. Because of the longevity factor, many organizations believe that their fiscal investments can be better used elsewhere. Social Security, for most, is not a true retirement option and was never intended to serve as a living wage for 20–30 years after retirement (Perman, 2010).

ERISA, the Employee Retirement Income Security Act of 1974, establishes a minimum standard for pension plans in private industry. It was designed to protect the interests of employee benefit plan participants by requiring the disclosure of financial information, establishing standards of conduct, and providing appropriate remedies and access to the federal court system in cases of irregularities. ERISA does not, however, require employers to establish plans; but if a plan is offered, it must be viable for vesting and must include provisions regulating benefit payouts for employees or surviving family members. For our company, ERISA regulations would require that we provide a written document showing how dollars will be invested, when those dollars become available, what minimum contributions are expected from both the employee and the organization, and how the long-term viability of the plan will be maintained (United States Department of Labor, 2012).

Plan A: Defined Benefit and Defined Contribution

We must first decide whether our proposed retirement plan is structured primarily as a benefit to the employee or as a strategic human resources allocation tool (for recruitment, retention, etc.). We perceive the goal to be multidimensional: to retain qualified workers and offer a plan that will assist them in meeting their medium- and long-term financial goals.

The Defined Benefit (DB) and Defined Contribution (DC) plan includes a benefit formula that specifies exactly the amount an employee will receive upon retirement. The benefits are secure, usually paid in the form of an annuity. The more years of service an employee has, the greater the pension they will receive. For example, under this plan the annual pension would equal $1,000 multiplied by years of service — an employee who works for 25 years would receive $25,000 per year, or approximately $2,083 per month from the annuity.

These plans are back-loaded in that the benefits do not accrue significantly until the end of the employee's career. The money for these plans is supplied by the company, though we could offer an option allowing the employee to contribute a set amount per year to increase their annuity payout at a competitive rate of interest — for example, 6%. This is a straightforward plan that requires long-term investing but allows for market fluctuation and investment opportunities over time. Typically, the employee would be partially vested after five years but would lose their benefits if they left the company prior to that point.

Plan B: Hybrid 401(k) and Stock Option Plan

The hybrid plan combines a 401(k), stock options, and years-of-service incentives. Under this option, the company would contribute up to a set percentage of matching funds for the employee per year, offer discounted stock options on an annual basis, and provide bonuses at the 5-, 10-, 15-, and 20-plus year milestones. This would encourage employees to participate more actively in their retirement benefits while allowing the company to invest in their workforce, strengthen the stock price, and improve its overall market presence (Baker et al., 2005; Beam, 2001).

Each plan offers advantages and disadvantages depending on the unique situation of the employee. The foundation for either plan, however, is a process of communication and buy-in from employees so that we can move forward toward funding. For the plan to be effective, it must be hierarchical, transparent, repetitive, and explanatory.