Employee Benefits: Three Major Plans

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Table of Contents

Introduction
Defined Benefit Pension Plans
Defined Contribution (401k) Plans
Self Funded/Insured Health and Welfare Plans
Conclusion
Works Cited

Introduction

The present paper examines in details three areas of employee benefits; these are: (i) defined benefit plans; (ii) defined contribution plans; (iii) self-funded insurance and other welfare program. The present paper, hence, looks at each of the above areas in considerable details and critically examines their weak and strong area while commenting on their present state. The paper also relates critical commentary by reviewing experts’ opinion and empirical evidence in the areas concerned. All three areas are separately discussed; however, where there is necessary, an inter-topical reference is made across sections for better understanding and building up of the argument.

Defined Benefit Pension Plans

Defined benefit pension plans pay retired employees a benefit which is based on a formula that takes into consideration two major areas of employees: the in-service years of the employees and their earnings; the amount may also be stated in flat dollars. It is necessary that the sponsors of defined benefit plans establish a fund that contains sufficient assets so that the prospective obligation in terms of pension can be discharged. However, the employer is required to bring in additional funds to bolster payments if the assets are, at any point in time, insufficient to manage liabilities. This plan is in contrast to defined contribution pension plan in that defined contribution plans actually base on collected contributions. These contributions are made on behalf of members and invested to a fund. There is a term “textbook” description regarding defined benefit pension plan. The term holds that “members of defined benefit pension plans bear no investment risk”. However, this is where controversy in terms of legal matters as well as at general level rises. Different scholars and experts view this situation differently. For instance, Hyatt and Pesando (1996) state that there are at least a few of the risks in the performance of investment fund that members of defined benefit plan bear which is through concessions in other part of the compensation offer. This is also where the distinction between defined benefit plans and defined contribution plans is blurred and hence gives way to straight argument. Hyatt and Pesando tested their hypothesis that members do bear risks of investment by brining into practice a number of empirical evidence and by conduction a number of case studies on some plans. The researchers reviewed U.S. and Canadian litigation side by side. A survey was also conducted that included pension professionals. Tradeoff between pensions and wages in 98 unionized organizations in Ontario was also undertaken to conduct an economic analysis. The authors reached to an empirical evidence that there is overstatement in between what is said to take place and what really does happen in defined benefit plans, that is, they found evidence that in U.S. and Canadian litigation and decision in arbitration areas it is accepted that members do bear the risks of fund investment although it is not accepted in all areas. Henceforth, it is important to note that defined benefit plans are more convenient in unionized and other organizational settings.

A very recent financial report by Mercer relates that the daily financial upheaval being experienced by Wall Street for the past many months is still continued and the result of this mayhem is directly on the country’s defined benefit plans which seem to get battered due to worsening economic conditions: “Since the end of 2007, the funded status of pension plans sponsored by large U.S. companies has fallen by almost $100 billion, according to analysis conducted by Mercer”. The surplus as such is being replaced by a deficit of 35 billion dollars which shows that pension plans are at a very shaky stage and the unknown and untold of danger for pensioners in the future is clearly visible because of reduction in funds and risks on liabilities. However, in the same report, experts opine that if markets settle in the near future, the situation is going to be under control; today, companies have to bear extensive pressure on their balance sheets putting the entire nation to fears and speculation about their future. At present, there is uncertainty with regard to plans put into execution. Therefore, companies are cautioned to sit tight with their short-term as well as long-term plans: anything can happen, thus it is important for the companies to visit and revisit their plans and policies and be ready for any downward jump which might bring disastrous consequences for their pension plans set forth in the past (Employee Benefit, 2008).

Defined Contribution (401k) Plans

A 401k plan is actually a defined contribution plan for savings for retirement. The specific definition of this plan is that: “The amount contributed to each participants’ account is set (“defined”) – either by the plan participant or by the employer, and as either a flat rate or a percentage of pay”. There are other defined contribution plans also that come into the same category of savings plans for retirement of employees. These plans include SEPs, Profit Sharing Plans, Simple IRAs, and Purchase Plans; however, looking at the present scenario in the American market, expert opine that 401K plan is the most popular plan today. There are particular characteristics of 401K plan that make it a most popular savings program for the American nation today. These characteristics can be stated as follows:

Every employee who participates in this plan has to decide upon a specific amount of payment that has to be withheld from their pay each month as a 401k contribution.
“The employer withholds the amounts BEFORE calculating income taxes on the employee’s pay”
There is a third party administrator to whom the money of the employee as such is forwarded by the employer. The third party administrator then invests the money according to the particular instructions that the employees provide.
There are some employers who opt to add 401k contributions by matching profit-sharing, “and/or qualified nonelective contributions”.

This is important to note that a 401k plan must be an employer-sponsored program. There are a number of technical (or legally technical) issues with regard to the conditions by which a sponsor-employer moves on with this plan. What comes out to be the central point is that this plan is greatly convenient for the participants opting for it because “Participants simply establish the contribution level they want, then the employer has the amount pulled from the participant’s pre-tax pay each period and forwarded to the 401k investments the participant has selected” (web-401k.com).

There is also an auto enrollment procedure observed under 401k plan. Under this enrollment, an employer is automatically enrolled in 401k plans as soon as the employee fulfills the requirement set forth as eligibility criteria. It is also possible for employees to elect to decline the enrollment at any given time. However, it is required that the employer must in advance set the contribution to be made under enrollment. This enrollment level, as such, is usually anything from 3 percent to 5 percent of the total compensation. It is also an obligatory condition that an employer must inform, at least once a year, all their employees about the total auto enrollment procedures, and other issues that are related to the employees ceasing to participate or block their participation into the auto enrollment plan. If participation status for an employee changes over given course of time, it is obligatory for the employer to inform that employee without any delays so that the employee is free to act at their own will. Any contributions that are made by the employer to the accounts of participants that hold traditional benefit program must also be made with the same level to the accounts of those employees that hold the auto enrollment status. This is also important that the employer must inform the employees of their right to change their basic investment scheme that can go through different selection or contribution rate. Automatic enrollment has another coinage: passive enrollment and negative enrollment. Negative election is the coinage for default investment and contribution designation. However, expert advise the employees to consult to a legal advisor “before adopting automatic enrollment for [their] 401k plan (web-401k.com).

A 401k plan, sponsored only by an employer, is a retirement program which is divided into two categories: i) defined benefit and the other is defined contribution. The first package of the plan (defined benefit plan) “the employer promises to pay a defined amount to retirees who meet certain eligibility criteria”. Whereas the other package of the plan (defined contribution plan) the “plan defines the contributions that an employer can make and not the benefit that the employee will receive at retirement”. 410k is a defined contribution plan. Hence the name suggests that the employee actually cannot foresee the actual monthly retirement income. So what practically applies in this plan is that when and if an employee quits working at a company, what they are usually entitled to receive under this plan is a lump sum of annuity which is calculated according to the contribution and the current average salary of that employee (residual-rewards.com).

Self Funded/Insured Health and Welfare Plans

Looking at the present financial condition of the country and sky-rocketing health care costs, it is the expert opinion that today more and more employees are moving toward self-funded health care plans that include health insurance and other welfare benefits to those employees. However, looking into the prevalent trends in the market reveals a different picture in which companies are moving from self-insurance and other self-funded benefits to insured programs. This shift is estimated to be due to the drive “by employers’ desire to transfer the volatility and uncertainty of health care cost increases to insurers, rather than retain it”. Thus, the other side of the argument is that self-insurance programs are losing ground, a fact contented by some experts also. None the less, the major point on which experts do come to offer a mutual agreement is that at this point in the nation’s economic condition there is no mass movement on either side that can be said to noteworthy. The movement away from self-insurance is seen in a different context in which companies that move away from self-insurance do that due to averring risk in a marketplace which is more likely to occur in significant expansion in total costs. However, for midsized companies opting for self-insurance and other self-funded programs is a practical solution “because their covered population generally would be big enough so that individual risks could be spread out”. All these statistics and reports that focus on market movement also offer a collective consent that “there’s a tremendous amount of uncertainty in the market, there then could potentially be a rush to insurance such as we haven’t seen since the late ‘70s”. Thus, it seems that self-funded insurance and other welfare programs are dependent on market conditions and that if markets get stable, there no doubt that the amount of such programs will rise to heights (Greenwald, 2001).

Self-insurer also view governmental policies and plans very critically and openly negate or oppose a number of them because of some solid reasons on their side. For instance, there is a lot of evidence in literature with regard to a number of acts; the debates are going on for a long time. The major point of conflict to the self-insurers is that the government, on the one hand, wants to show high interest in providing coverage to all those who are uninsured; yet, on the other hand, they state that government is making it “more difficult for employers to provide coverage”. For instance a patient’s bill of rights is something that eventually gives rise to health care cost because it imposes extra regulations and extra liabilities on the companies and organizations that provide health care. These costs simply fall upon the shoulders of the employees (directly or indirectly) and cause their pay to lower or cause employees’ benefits to reduce. Thus in legislative discourse what is important is to deal with the issues of liabilities so that added expense and other restrictions can be addressed to reduce the risk on the part of the self-funded employees so that they can feel secure. One way to around the same point is to ensure that the employers receive a clearly defined line of action so that they can benefit a number of employees (Hofmann, 1999).

Conclusion

Although there are certain limitations in all the savings and welfare programs noted and critically examined above. There is no doubt that 401k plans are more popular in the U.S. because of the fact that they provide greater liberty to the employee. These plan offer freedom of selection and employees are free to opt out from an employment without losing their due share in the investment made at a specific job. Although 401k plans do not offer employees to go for a decided pension income, they do offer solid safety in terms of investment for the future.

Works Cited

Employee Benefit (2008). “The hits just keep on coming: Already weakened pension plans hit harder by stock market collapse.(Defined Benefit Retirement).” Employee Benefit News. HighBeam Research.
Greenwald, J. (2001). “Health cost volatility may spur shift in self-funding.(self-insured benefit plans).” Business Insurance. Crain Communications, Inc. HighBeam Research.
Hofmann, A. M. (1999). “SELF-INSURERS TAKING AIM AT MANAGED CARE LEGISLATION: PATIENTS’ RIGHTS PROPOSALS DISCOURAGE SPONSORSHIP OF BENEFIT PLANS, EMPLOYERS SAY.” Business Insurance. Crain Communications, Inc. HighBeam Research.
Hyatt, D. E., & Pesando, J. (1996). “The distribution of investment risk in defined benefit pension plans: a reconsideration.” Industrial Relations (Canadian). HighBeam Research.
Residual-rewards.com – (2008). 401k retirement plan 2008.
Web-401k.com – (2008). 401k basics: the concepts that shape 401k plans.

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Employee Benefits: Three Major Plans

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