Benefit plan and defined contribution plan Discussion

Original question -Would employees prefer a defined benefit plan or defined contribution plan? Defend your answer.

2 Response answers, must have a total word count of 250 each and must be cited with at least 2 scholarly sources.

Student 1 Ericka

To understand whether employees would prefer a defined benefits or defined contribution plan, the employee must understand the what the different plans are and the advantages and disadvantages of the different plans. The defined benefits plan, also known as pensions plans, are retirement benefits given typically in a monthly sum to employees once the employee has reached a specified term with the employer (Martocchio, 2017). The defined contribution plan provides retirement benefits to employees based on the amount the employee contributes and in some situations, the amount the employer contributes as well (Martocchio, 2017). Both plans have advantages and disadvantages and employees’ opinions will vary as to which is best.

The advantages of the defined benefits plans are the employee is guaranteed to be paid out as long as the employee meets the minimum qualifications of time served with the company and the minimum age required before benefits are distributed, the employee with receive a certain amount for the remainder of the employees life, and the employer is responsible for the funding to the retirement account (Martocchio, 2017). The advantages of the defined contribution plans are employees can determine the amount contributed to the plan to have a hire monthly payout for retirement, employees can take out a lump sum when the employee desires, the contributions are placed into a separate account for each individual that can be monitored, and the employee is in charge of the investments of the retirement funds, so with the proper investments, the employee can increase the retirement fund (Martocchio, 2017). The disadvantages of the defined benefits plan are if the employee leave the employer prior to the minimum age and tenure requirements, the employee loses the retirement plan, the actual funding for many defined benefits plans are only roughly 80% of the actual funding to pay out the employees retirement, the employees retirement funds are not tracked individually, and employees do not have the benefit of potentially increasing the amount of retirement income through investing (Martocchio, 2017; Swisher, 2018). The disadvantages of the defined contribution plans do not guarantee a benefit amount due to the different contributions and investments that can be made, and this type of retirement plan depends on the stock markets and investment decisions, which is risky since the stock market is susceptible to crashes and the employee’s retirement fund can be lost (Martocchio, 2017).

For employees who plan to stay with the organization the employee currently works for, is comfortable with the retirement amount the defined benefit plan will provide, employees who do not need early pay outs, and when employees want a guaranteed retirement payout, the defined benefits plan will be more desirable for the employee (Martocchio, 2017). For employees who want the freedom of switching jobs without losing retirements plans, would like to know how much retirement funding is in the account, is able to contribute to the account, would like the ability to make withdrawals, and are comfortable with the risks involved with investing the retirement account, the defined contribution plan would be the best for the employee (Martocchio, 2017). Each individual employee has different needs that will be deciding factors as to which plan would be best for the employee’s situation, so one specific plan would be difficult to decide upon for employees and when deciding upon a plan, each employee’s needs will need to be taken into consideration to make the best decision possible for the organization.

Student 2 Paul

Companies that provide retirement benefits can use either a defined benefit plan or a defined contribution plan, but which to employees prefer? The defined benefits plan is a retirement plan that promises a specific monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns (Guerriero, 2018). The defined contribution plan is a retirement plan which the employer and the employee make regular contributions and an individual account is set up for participants and benefits are based on the amounts credited to these accounts, plus any investment earnings on the money in the account (Brown, 2016). The plans both allow for the employee to have income security upon retirement and is an amazing benefit for employees. Employees would prefer the defined benefits because it has specifically defined benefits making planning retirement an easier task. The employee knowing what the retirement income will be for life will make the retirement more stable and predictable.

The company can struggle to meet the requirements of the defined by the benefit program. The company must fund the benefits committed to by the plan and must be part of the yearly operating budget. Many companies and organizations have struggled to meet the retirement benefits of the employees. This among other issues is why several companies have shifted away from a defined benefit plan to a combined contribution plan (Kozak, 2017). The defined contribution plan relies on the returns of the contributions of the both the company and the employee for a market funded retirement. It is not a guaranteed return, but with appropriate management the return could be more. The employee may prefer the defined benefits plan, but many companies prefer the defined contribution plan.

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