Patricia Little and Brandi Wheeler are neighbors in Reston, Virginia. Patricia works as a software engineer for Progressive Apps Corporation, while Brandi works as an executive for an industrial packaging company. Both are married, have two children, and are well paid. Patricia and Brandi are interested in better understanding their pension and retirement plans.
Patricia’s company has a contributory plan in which 5 percent of the employees’ annual wages are deducted to meet the cost of the benefits. The firm contributes an amount equal to the employee contribution. The plan uses a 5-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.
Brandi’s company has a minimum retirement age of 60. Employees (full-time, hourly, or salaried) must meet participation requirements. Further, in contrast to Patricia’s retirement plan, Brandi’s 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.
1.Discuss and contrast the features of the retirement plans offered by Patricia and Brandi’s companies.
2.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.
3.Explain how you would use each of these plans in developing your own retirement program.
4.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.