Comparing Pension Plan Features

Melanie Warrick and Sherry Wilkinson are neighbors in Charlotte. Melanie works as a software engineer for Analytical Solutions Corporation, while Sherry works as an executive for Precision Manufacturing Company. Both are married, have two children, and are well paid. Before Melanie and Sherry joined their respective companies, there had been some employee unrest and strikes. To counteract these problems, their firms had developed job enrichment and employee motivation programs. Of particular interest are the portions of these programs dealing with pensions and retirement.

Analytical Solutions Corporation, the company where Melanie works, has a contributory plan in which 5 percent of the employees’ annual wages is deducted to meet the cost of the benefits. The firm contributes an amount equal to the employee contribution. The plan uses a five-year graded vesting procedure; it has a normal retirement age of 60 for all employees, and the benefits at retirement are paid according to a defined contribution plan.

Although Precision Manufacturing, where Sherry works, has a minimum retirement age of 60, it provides an extension period of five to six years before compulsory retirement. Employees (full-time, hourly, or salaried) must meet participation requirements. Further, in contrast to the Analytical Solutions plan, the Precision Manufacturing program has a noncontributory feature. Annual retirement benefits are computed according to the following formula: 2 percent of the employee’s final annual salary for each year of service with the company is paid upon retirement. The plan vests immediately.

Critical Thinking Questions

Discuss and contrast the features of the retirement plans offered by Analytical Solutions and Precision Manufacturing.

Which plan do you think is more desirable? Consider the features, retirement age, and benefit computations just described. Which plan do you think could be subject to a conversion to a cash-balance plan sometime in the future? Explain. Include in your answer the implications for the employee’s future retirement benefits.

Explain how you would use each of these plans in developing your own retirement program.

What role, if any, could annuities play in these retirement programs? Discuss the pros and cons of using annuities as a part of retirement planning.

Please answer all questions