Defined Pension Plans Flashcards
A recent statistical analysis by the human resources department of XYZ, Inc., has revealed that the average age of its employees is over 40. Management is concerned about the potential impact of this fact on the company’s pension plan. The human resources manager wants a defined benefit plan that awards employees retirement compensation based on the highest 10 years’ earnings, excluding bonuses.
As CFO, prepare a memo to the management team explaining the advantages and risks associated with the proposed pension plan and what alternatives might be available.
Advantages.
-Employees because they are able to define their retirement benefits with more reliability.
-Directly benefits the employer when actual returns are higher than expected and therefore the company’s funding demands decrease.
-Alleviate some of the burden placed on the employer and offer employees the chance to invest in their own future.
A recent statistical analysis by the human resources department of XYZ, Inc., has revealed that the average age of its employees is over 40. Management is concerned about the potential impact of this fact on the company’s pension plan. The human resources manager wants a defined benefit plan that awards employees retirement compensation based on the highest 10 years’ earnings, excluding bonuses.
As CFO, prepare a memo to the management team explaining the advantages and risks associated with the proposed pension plan and what alternatives might be available.
Associated Risks.
-Market fluctuations such as stock market swings pose a risk should the returns be less than expected.
-They are also generally more costly for employers than other plans such as a defined contribution pension plans.
-The suggested plan awarding employees retirement compensation based on the highest 10 years’ earnings naturally presents elevated funding demands for the company.
