Benefit plan and defined contribution plan Discussion Original question -Would employees prefer a defined benefit plan or defined contribution plan? Defend

Benefit plan and defined contribution plan Discussion Original question -Would employees prefer a defined benefit plan or defined contribution plan? Defend your answer. 2 Response answers, must have a total word count of 250 each and must be cited with at least 2 scholarly sources. Student 1 Ericka To understand whether employees would prefer a defined benefits or defined contribution plan, the employee must understand the what the different plans are and the advantages and disadvantages of the different plans. The defined benefits plan, also known as pensions plans, are retirement benefits given typically in a monthly sum to employees once the employee has reached a specified term with the employer (Martocchio, 2017). The defined contribution plan provides retirement benefits to employees based on the amount the employee contributes and in some situations, the amount the employer contributes as well (Martocchio, 2017). Both plans have advantages and disadvantages and employees’ opinions will vary as to which is best. The advantages of the defined benefits plans are the employee is guaranteed to be paid out as long as the employee meets the minimum qualifications of time served with the company and the minimum age required before benefits are distributed, the employee with receive a certain amount for the remainder of the employees life, and the employer is responsible for the funding to the retirement account (Martocchio, 2017). The advantages of the defined contribution plans are employees can determine the amount contributed to the plan to have a hire monthly payout for retirement, employees can take out a lump sum when the employee desires, the contributions are placed into a separate account for each individual that can be monitored, and the employee is in charge of the investments of the retirement funds, so with the proper investments, the employee can increase the retirement fund (Martocchio, 2017). The disadvantages of the defined benefits plan are if the employee leave the employer prior to the minimum age and tenure requirements, the employee loses the retirement plan, the actual funding for many defined benefits plans are only roughly 80% of the actual funding to pay out the employees retirement, the employees retirement funds are not tracked individually, and employees do not have the benefit of potentially increasing the amount of retirement income through investing (Martocchio, 2017; Swisher, 2018). The disadvantages of the defined contribution plans do not guarantee a benefit amount due to the different contributions and investments that can be made, and this type of retirement plan depends on the stock markets and investment decisions, which is risky since the stock market is susceptible to crashes and the employee’s retirement fund can be lost (Martocchio, 2017). For employees who plan to stay with the organization the employee currently works for, is comfortable with the retirement amount the defined benefit plan will provide, employees who do not need early pay outs, and when employees want a guaranteed retirement payout, the defined benefits plan will be more desirable for the employee (Martocchio, 2017). For employees who want the freedom of switching jobs without losing retirements plans, would like to know how much retirement funding is in the account, is able to contribute to the account, would like the ability to make withdrawals, and are comfortable with the risks involved with investing the retirement account, the defined contribution plan would be the best for the employee (Martocchio, 2017). Each individual employee has different needs that will be deciding factors as to which plan would be best for the employee’s situation, so one specific plan would be difficult to decide upon for employees and when deciding upon a plan, each employee’s needs will need to be taken into consideration to make the best decision possible for the organization. Student 2 Paul Companies that provide retirement benefits can use either a defined benefit plan or a defined contribution plan, but which to employees prefer? The defined benefits plan is a retirement plan that promises a specific monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns (Guerriero, 2018). The defined contribution plan is a retirement plan which the employer and the employee make regular contributions and an individual account is set up for participants and benefits are based on the amounts credited to these accounts, plus any investment earnings on the money in the account (Brown, 2016). The plans both allow for the employee to have income security upon retirement and is an amazing benefit for employees. Employees would prefer the defined benefits because it has specifically defined benefits making planning retirement an easier task. The employee knowing what the retirement income will be for life will make the retirement more stable and predictable. The company can struggle to meet the requirements of the defined by the benefit program. The company must fund the benefits committed to by the plan and must be part of the yearly operating budget. Many companies and organizations have struggled to meet the retirement benefits of the employees. This among other issues is why several companies have shifted away from a defined benefit plan to a combined contribution plan (Kozak, 2017). The defined contribution plan relies on the returns of the contributions of the both the company and the employee for a market funded retirement. It is not a guaranteed return, but with appropriate management the return could be more. The employee may prefer the defined benefits plan, but many companies prefer the defined contribution plan. EMPLOYEE BENEFITS
Where We Are Now:
the concepts and methods
to build compensation systems that meet important goals of compensation professionE
als, including internal consistency, market competitiveness, and recognition of employee
contributions. Our focus was on core compensation issues. We do know that employee
benefits represent an important component of total compensation. Now we turn to

D !
also give attention to designing and planning the benefits
E program in the discretionary
benefits chapter.
Chapter 9
ISBN 1-323-59381-0
You can access the CompAnalysis Software to complete
3 the online Building Strategic
Compensation Systems Project by logging into
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
Discretionary Benefits
Learning Objectives
When you finish studying this chapter,
A you should be able to:
9-1. Discuss the origins of discretionary
9-2. Explain the three categories of discretionary benefits.
9-3. Summarize legislation that pertains to discretionary benefits.
9-4. Discuss the fundamentals of designing and planning the benefits program.
9-5. Explain the benefits and costs of discretionary benefits.
If your professor has assigned this, go to the Assignments section of
to complete the Chapter Warm-Up! and see what you already know. After reading the
chapter, you’ll have a chance toD
take the Chapter Quiz! and see what you’ve learned.
A a significant cost to companies. In 2014, on average,
Today, discretionary benefits represent
companies spent nearly $15,000 per employee.1 For the same period, discretionary benefits
accounted for nearly 23 percent of employers’ total payroll costs.
As the term implies, discretionary1benefits are offered at the will of company management.
Discretionary benefits fall into three 1
broad categories: protection programs, paid time off, and
services. Protection programs provide
2 family benefits, promote wellness, and guard against
income loss caused by such catastrophic factors as disability, serious illness, or death. Retirement
3 as an income source throughout retirement. Paid time
plans assist employees to accumulate wealth
off, not surprisingly, provides employees
T time off with pay for such events as vacations. Services
provide such enhancements as tuition reimbursement and day care assistance to employees and
their families.
9-1. Discuss the
origins of discretionary
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
In the past several decades, firms have offered a tremendous number of both legally required and
discretionary benefits. In Chapter 10, we will discuss how the growth in legally required benefits
from a select body of federal and state legislation developed out of social welfare philosophies.
Quite different from these reasons are several factors that have contributed to the rise in discretionary benefits.
The rise of retirement plans, in particular, pension plans, appeared as one of the first signs
in the use of discretionary benefits. According to the Employee Benefit Research Institute,2 the
first pension plan in the United States was established in 1759 to benefit widows and children of
Presbyterian ministers. In 1875, the American Express Company established a formal pension
plan. From that point until World War II, pension plans were adopted primarily in the railroad,
banking, and public utility industries. The most significant growth occurred after the favorable
tax treatment of pensions was established through the passage of the Revenue Act of 1921, and
government-imposed wage increase controls during World War II in the early 1940s led more
companies to adopt discretionary employee benefits.
Because of the government-imposed wage freezes, companies invested in expanded discretionary benefits offerings as an alternative to pay hikes as a motivational tool. As a result, many
companies began to offer welfare practices. Welfare practices were “anything for the comfort
and improvement, intellectual or social, of the employees, over and above wages paid, which is
G companies offered employees
not a necessity of the industry nor required by law.”3 Moreover,
welfare benefits to promote good management and to enhance
A worker productivity.
The opportunities for employees through welfare practices varied. For example, some
T provided financial assistance for
employers offered libraries and recreational areas, and others
education, home purchases, and home improvements. In E
addition, employers’ sponsorships of
medical insurance coverage became common, which, until S
the Patient Protection and Affordable
Care Act of 2010, was made on a discretionary basis.
, unions also directly contributed
Quite apart from the benevolence of employers, employee
to the increase in employee welfare practices through the National Labor Relations Act of 1935
(NLRA), which legitimized bargaining for employee benefits. Even today, union workers tend to
have greater access to discretionary benefits than do nonunion employees.4 Table 9-1 illustrates
E and union employees as well as
some of the differences in particular benefits between nonunion
by major occupational groups, and full- and part-time workAstatus.
Unions also indirectly contributed to the rise in discretionary benefits offerings in nonunion
N often fashion their employment
settings. As we discussed in Chapter 2, nonunion companies
practices after union companies as a tactic to minimize the D
chance that their employees will seek
union representation5 and may offer their employees benefits
R that are comparable to the benefits
received by employees in union shops.
TABLE 9-1 Percentage of Workers with Access to Selected Employee Benefits in
Private Industry: March 2014
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%& 22ƒ”
Child Care
Worker Characteristics
Management occupations
Production, transportation, and material-moving
Service occupations
Source: Based on U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Benefits in the United States,
March 2014 (Bulletin 2779). Available:, accessed March 11, 2015.
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.

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Through many decades, discretionary benefit offerings were based on a relatively homogenous workforce, characterized by males who were the sole bread winners and provided for
their wives and children. In recent decades, the labor force has become more diverse in terms of
age, gender, race, ethnicity, and definition of families based on same-sex civil unions and marriage.6 Increasing diversity has given rise to flexible benefit plans, which we discuss later in this
chapter. According to the U.S. Bureau of Labor Statistics, labor force diversity will continue to
increase. A standardized, one-size-fits-all employer-sponsored benefits program is most effective when the workforce is relatively similar in terms of needs and preferences.
For example, let’s assume a company’s workforce has 60 percent women and 40 percent
men. Most of the women are of child-bearing age and most of the men range in age between
their 50s and 60s. One could reasonably expect that there will be substantial differences in the
needs and preferences for benefits. Chances are that most of the women in this example may
place a high value on day care benefits while most of the men will not have a need for such
G to be near or at adulthood.
benefits because their children are likely
9-2. Explain the
three categories of
discretionary benefits.
Several benefits practices fall into the
S category of discretionary employee benefits. We can
explore these practices by recognizing the three broad goals employers hope to achieve when
offering discretionary benefits: protection, paid time off, and services to enhance work and life
Three important discretionary protection programs include disability insurance, life insurance,
A employer-sponsored health insurance benefits were
and retirement programs. Until recently,
offered on a discretionary basis, falling
N into the protection category. Since the passage of the
Patient Protection and Affordable Care Act of 2010, the government has imposed an employer
mandate for health insurance. As such, we will review health insurance as a legally required
benefit in Chapter 10.
DISABILITY INSURANCE Disability insurance
replaces income for employees who become
Protection Programs
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
unable to work because of sicknesses or accidents. Employees unfortunately need this kind of
protection. At all working ages, the probability of being disabled for at least 90 consecutive days
is much greater than the chance of dying while working; one of every three employees will have
a disability that lasts at least 90 days.71
Employer-sponsored or group disability
insurance typically takes two forms. The first,
short-term disability insurance provides benefits for a limited time, usually less than
6 months.8 Approximately 40 percent of private sector workers had access to employersponsored short-term disability plansTin 2014.9 Access was greater in more hazardous work
environments, such as manufacturing,
S where approximately 63 percent of workers had
access. The second, long-term disability insurance provides benefits for extended periods
between 6 months and life. Approximately 34 percent of private sector workers had access
to employer-sponsored short-term disability plans in 2014.10 Access was greater in more
hazardous work environments, such as manufacturing, where approximately 44 percent of
workers had access.
Disability criteria differ between short- and long-term plans. Short-term plans usually
consider disability as an inability to perform any and every duty of the disabled person’s occupation. Long-term plans use a more stringent definition, specifying disability as an inability to
engage in any occupation for which the individual is qualified by reason of training, education,
or experience.
Short-term disability plans classify short-term disability as an inability to perform the duties
of one’s regular job. Manifestations of short-term disability include the following temporary
(short-term) conditions:
ISBN 1-323-59381-0
Recovery from injuries
Recovery from surgery
Treatment of an illness requiring any hospitalization
Pregnancy—the Pregnancy Discrimination Act of 1978 mandates that employers treat
pregnancy and childbirth the same way they treat other causes of disability (Chapter 2)
Most short-term disability plans pay employees 60 to 70 percent of their pretax salary on a
monthly or weekly basis.11 Many companies set a maximum benefit amount. In 2014, the typical maximum annual benefit amount was $2,400.
Three additional features of short-term disability plans include the preexisting condition
G conditions. Similar to health insurclause, two waiting periods, and exclusions of particular health
ance plans, a preexisting condition is a mental or physicalAdisability for which medical advice,
diagnosis, care, or treatment was received during a designated period preceding the beginning of
T any time prior to employment and
disability insurance coverage. The designated period is usually
enrollment in a company’s disability insurance plan. Insurance
E companies impose preexisting conditions to limit their liabilities for disabilities that predate an S
individual’s coverage.
Two waiting periods include the preeligibility period and an elimination period. The
preeligibility period spans from the initial date of hire to, the time of eligibility for coverage
in a disability insurance program. Once the preeligibility period has expired, an elimination
period refers to the minimum amount of time an employee must wait after becoming disabled
before disability insurance payments begin. Elimination periods exclude insignificant illnesses
or injuries that limit a person’s ability to work for just a fewEdays.
Short-term disability plans often contain exclusion provisions.
Exclusion provisions list
the particular health conditions that are ineligible for coverage. Disabilities that result from selfinflicted injuries are almost always excluded. Short-termNdisability plans often exclude most
D (e.g., addictions to alcohol or illemental illnesses or disabilities due to chemical dependencies
gal drugs). Many employers support addicted workers through
R employee assistance programs,
which we will discuss shortly.
A to employees who, due to illness
Long-term disability insurance provides a monthly benefit
or injury, are unable to work for an extended period of time. Payments of long-term disability
benefits usually begin after three to six months of disability and continue for a specified number
of months. Payments generally equal a fixed percentage of pre-disability earnings, most typi1
cally, 50 to 60 percent.12
Long-term disability insurance companies rely on a two-stage
definition for long-term dis2
ability. Long-term disability initially refers to illnesses or accidents that prevent an employee
from performing his or her “own occupation” over a designated period. The term own occupation applies to employees based on education, training, T
or experience. After the designated
period elapses, the definition becomes more inclusive by adding
S the phrase “inability to perform
any occupation or to engage in any paid employment.” The second-stage definition is consistent
with the concept of disability in workers’ compensation programs (Chapter 10). There are four
types of disabilities: temporary total, permanent total, temporary partial, and permanent partial.
Full benefits usually equal 50 to 70 percent of monthly pretax salary, subject to a maximum
dollar amount. As for short-term plans, the monthly maximum may be as high as $5,000. Longterm benefits are generally subject to a waiting period of anywhere from 6 months to 1 year and
usually become active only after an employee’s sick leave and short-term disability benefits have
been exhausted.
Long-term disability plans also include preexisting condition and exclusion clauses. These
are similar to the provisions in short-term disability plans. Long-term plans impose two waiting
periods: preeligibility period and elimination period. The preeligibility periods for short- and
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.

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long-term plans are usually identical. When companies offer both plans, the elimination period
expires upon the exhaustion of short-term benefits. As discussed earlier, long-term plans become
effective immediately following the end of short-term benefit payments, making the elimination
period virtually nonexistent. When companies offer long-term plans only, the elimination period
runs three to six months following a disability.
Both short- and long-term disability plans may duplicate disability benefits mandated by the
Social Security Act and state workers’ compensation laws (Chapter 10). These employer-sponsored
plans generally supplement legally required benefits. Employer-sponsored plans do not replace disability benefits mandated by laws – workers’ compensation and disability benefits through the Social
Security Act of 1935, which we will discuss in Chapter 10.
LIFE INSURANCE Employer-provided life insurance protects employees’ families by paying a
specified amount to an employee’s beneficiaries upon the employee’s death. Most policies pay
a fixed multiple of the employee’s salary.
G Customarily, the multiple equals one to two times
an employee’s annual salary. Employer-sponsored life insurance plans also frequently include
accidental death and dismemberment claims,
which pay additional benefits if death was the result
of an accident or if the insured incurs accidental
loss of a limb. In 2014, approximately 57 percent
of private sector employees had access to employer-sponsored life insurance protection.13
There are three kinds of life insurance: term life insurance, whole life insurance, and universal
life insurance. Term life insurance, theSmost common type offered by companies, provides protection to employees’ beneficiaries only during
a limited period based on a specified number of years
(e.g., 5 years) subject to a maximum age (e.g., 65 or 70). After that, insurance protection automatically expires. Neither the employee nor his or her beneficiaries receives any benefit upon expiration.
Whole life insurance pays an D
amount to the designated beneficiaries of the deceased
employee, but unlike term policies, whole
E life plans do not terminate until payment is made to
beneficiaries. As a result, whole life insurance policies are substantially more expensive than are
A insurance approach an uncommon feature of employerterm life policies, making the whole life
sponsored insurance programs. FromNthe employee’s or his or her beneficiary’s perspective,
whole life insurance policies combineD
insurance protection with a savings (or cash accumulation
plan). That is, a portion of the money paid to meet the policy’s premium will be available in the
Rwith a low fixed annual interest rate of usually no more
future. The amount will be augmented
than two or three percent. Universal life
A insurance combines features of term life insurance and
whole life insurance. The insured may shift money between the insurance and savings components of the policy, making this a more flexible alternative to whole life insurance.
1 retirement. Individuals may participate in more than one
beneficiaries during some or all of their
program simultaneously where employers
2 offer this option. Companies establish retirement or
pension plans following one of three3design configurations: a defined benefit plan (commonly
referred to as pension plan), a defined contribution plan, or hybrid plans that combine features
T contribution plans. According to the U.S. Bureau of
of traditional defined benefit and defined
Labor Statistics, nearly 55 percent ofSworkers employed in the private sector participated in at
RETIREMENT PROGRAMS Retirement programs provide income to employees and their
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
least one company-sponsored retirement plan from 1992–1993. In 2014, the p…
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