I’m working on a Accounting exercise and need support.
For the longest time, companies offered the employees who stayed with the company for many years a defined pension plan to help them retire when it was time. That time has since passed and companies now offer a defined contribution plan instead.
Why do you think that they have made this change? Do you think that this is an ethical behavior for the companies of today? Why or why not?
Just do response each each posted # 1 to 3 down below only
The defined benefits plan designates what an employer will receive for retirement. The employee has no control over the defined benefits plan. Under the defined contribution plan, employers are allowed to contribute and invest funds to save for retirement. Employees are also allowed to make investment decisions. I believe that companies have made this change because it is less expensive and it gives the employer more control over their future. The amount invested is determined by the employee, relieving the company from those obligations. It is only fair that an employee gets out what they put in. It does seem safe to have a guaranteed benefits plan but not fair. An employee who invest more money and time deserves much more than one who contributes less. The employee also decide on what to invest in with the contribution plan. By doing this the employer is not held responsible for the outcome. I do believe that this change is ethical. It gives the employee control and freedom. The downfall is, some employees may not know how to invest or what to invest in, and the decisions they make may not be best.
In my opinion, cost is the main driver for the change that Companies have been making from Defined benefit plans to Defined contribution plan. According to Kieso, Weygandt and Warfield (2018), a Defined benefit plan can cost 2 to 3 percent more than a Defined contribution plan. In a globalized and very increasing competitive environment, each 1% of cost makes a lot of difference for a Company that wants to succeed in such challenging scenario.
It is very difficult to judge whether this is an ethical behavior of the Companies, since the economy and market frequently change. The Companies need to periodically review and adjust their employee benefit policies and procedures in order to keep their operations at a competitive level. Additionally, a defined contribution plan still represents a benefit given to the employees (in some countries it is not required) and it should still be taken into consideration.
Another important thing to consider is that the accounting process for the Defined Contribution Plan is much easier than the Defined Benefit Plan, which reduces potential costs with actuaries.
According to the textbook, “a pension plan is funded when the employer makes payment to a funding agency. That agency accumulates the assets of the pension fund and makes payments to the recipients as the benefits come due (Kieso et al, 2018)”. Whereas a defined contribution plan is when “the employer agrees to contribute to a pension trust a certain sum each period, based on a formula. This formula may consider such factors as age, length of employee service, employer’s profits, and compensation level. It makes no promise regarding the ultimate benefits paid out to the employees (Kieso et al, 2018)”. Thus, I believe there is an obvious reason companies choose to elect this plan versus the previous one, defined benefit plans are more expensive for employers than defined contribution plans. In addition, defined-benefit plans entail complicated actuarial projections and insurance for guarantees which make the administrative costs extremely high. “The shift to defined-contribution plans have put the burden of investing and saving for retirement on employees (Investopedia, 2020)”.
Additional benefits companies reap by offering a defined-contribution plan is “ the employer has no obligation toward the account’s performance after the funds are deposited, these plans require little work, are low risk to the employer, and cost less to the administer (Investopedia, 2020)”. Now the question arises, is this an ethical behavior for companies? My answer to that question is two-fold. Yes, technically this is ethical behavior that produces great cost-savings for companies. However, the burden is now placed on employees to ensure they are funding their retirement plan, so if an employee is unable to contribute to the plan because of various financial reasons, they could lose out on having that retirement cushion. In addition, they would lose the benefit of having the employer contribute matching contributions up to a certain amount. Lastly, when companies offered defined-benefit plans there was a certainty that eligible employees would receive a specified amount of income for life when they retired. Now that guarantee has been removed and employees are left to fend for themselves because the investment results from defined-contribution plans are not predictable, the ultimate benefit at retirement is undefined (Investopedia, 2020).
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