Selection of Benefits Plan or Selection of Plan Related to Investment Choice for Tertiary-Sector Employees
Introduction:
Tertiary-sector employees are the employees working in the tertiary industry. The tertiary industry is related to the industry of provision of services for customers. Following are some of the identified and significant factors which must be considered by the employees working in tertiary-sector of the organization while deciding regarding benefit plan or plan related to investment choice (Stevenson & Wood, 2019).
Investment Choice Plan:
Plan related to investment choice is also alternatively acknowledged as a contribution plan. It is considered to be a plan which is utilized after retirement because it is related to the retirement of the employee. In investment choice related plan, both involved parties’ employer, as well as employee, is responsible for contributing in a specifically formulated investment benefit account which will be in favor of the employee and will be given to the employee after retirement (401k Help Center, 2019). As far as the contribution of the employer is concerned, it is decided in advance that a specific amount of the salary will be contributed by the employer in the mutual fund account. It is important to understand that the contribution of an employee is not necessarily required to be constant as it can change from one month to another month according to the paying capacity of the employee. According to this plan, there is no type of guarantee related to return on investment. Under this type of investment plan, the return on investment is mostly dependent on the portfolio related to security. Most significant factors which should be considered in the plan related to investment choice are the input made by the employer as well as the employee in the contribution account at the end of every financial year (Hirt et al., 2010).
Defined Benefit Plan:
This type of plan will provide benefit to the employee, which will be paid to him after his retirement (AXA Equitable Financial Services, 2019). There are different factors responsible for influencing defined pension plan. Some of these significant identified factors include the final average total salary or package of the employee, the number of saving years of the employee related to that organization and the present age of the employee working in the organization. Under this benefit plan, risk related to return on investment will be the responsibility of the employer. Employer will be responsible for providing a specific pre-decided fixed amount to the employee as retirement benefit after his retirement (Lakhotia, 2014).
There are different factors responsible for influencing the defined pension plan of the employee in any organization. Some of the significant factors have been identified in this assignment. Some of this factor includes the total number of years of service of the employee in the organization, the final total package of the employee in the organization, and present age of the employee working in the organization. There are also different factors responsible for influencing plan related to investment choice, and some of these identified factors include input made by the employer & employee in the organization, return on investment and amount of expenses incurred on such plan (Dore, 2015).
Different factors like number of service years of employee in the organization, average salary of the employee in the organization, inflation rate prevailing in the country, present age of the employee and other related factors table for making decision related to selection of defined pension plan or plan related to investment choice (Kagan, 2018). If the employee selects the defined pension plan, then he will not be responsible for the risk related to return on investment. The employee will receive a specific fixed amount at the end of his employment with the organization, and this amount will be pre-decided between the company and the employee. If the employee working in the tertiary-sector has selected the plan related to investment choice, then he will be receiving the total input made by the employer & employee. He will receive the total amount after his retirement from his employment. In this case, risk related to the investment will be associated with the input made by the employee and employer as well. That is why; final plan related to retirement will be dependent upon the risk which the employee is willing to take (Jones & Catanach, 2015).
Following Factors should be important for consideration for tertiary-employees:
In case of any termination, plan related to investment choice is better as compared to the defined pension plan. It is mostly because of the fact that due to termination; management can deduct a specific amount from the defined pension plan but management cannot detect amount from plan related to investment choice as it is the legal right of the employee, so I believe that plan related to investment choice is better as compared to as far as termination is concerned (Minnesota State, 2019).
Another significant element which must be considered while making the selection is insurance. Employees of the tertiary sector are given insurance in case of plan related to investment choice, but employees are not provided insurance in case of the defined pension plan. Insurance provided to employees in case of plan related to investment choice will help them to cover their related medical expenses (Minnesota State, 2019). That is why; plan related to investment choice would be beneficial for the employees from the insurance perspective.
As far as investment is concerned, investment decisions made by the employee in case of plan related to investment choice will influence the retirement benefit of that specific employee. In the case of a defined pension plan, investment decisions made by the employee in the organization will not influence the retirement benefit of that specific employee (The Pensions Authority, 2015).
As far as a defined pension plan is concerned, the employee will be provided with a guaranteed income amount while in case of plan related to investment choice; there will be no guarantee provided related to Income stream. That is why; defined pension plan is better in case of guaranteed income earnings for the employee of the tertiary sector.
As far as investment risk is concerned, the risk associated with plan related to investment choice is higher as compared to the risk associated with defined pension plan benefit plan provides a specific guaranteed amount related to return on investment while plan related to investment choice is not able to provide a guaranteed return on investment. Employees having conservative nature are mostly inclined towards adopting a defined pension plan while employees having risk-oriented nature give priority to planning related to investment choice (Gitman et al., 2013).
One of the most significant factors associated with retirement is the complication and calculation related to the retirement plan. Most of the employees are worried that their employer should provide a significant and adequate amount to them in case of retirement. As far as a defined pension plan is concerned, calculation related to this plan is very easy as the amount is already decided and defined. As far as plan related to investment choice is concerned, the rate of contribution varies from time to time, and this adjustment makes it difficult for the employee to achieve a specific desired result (Hirt et al., 2010).
In case of plan related to investment choice, benefit related to the retirement of the employees is mostly dependent upon the salary level of that employee and number of years that employee has worked in the organization, but these factors are not important in case of define as defined pension plan is mostly dependent upon the average salary of that specific employee. Inventory organizations are considered to be more appropriate as compared to plan related to investment choice mostly because of the terms of incentive related to both types of retirement options. As far as a defined pension plan is concerned, several incentives are significant and higher as compared to plan related to investment choice. This is mostly because the average salary of the employee is highest at the end of his employment tenure of due to which defined pension plan is considered to be more beneficial and attractive as compared to plan related to investment choice (Valentine & Scott, 2011).
In case of the high rate of inflation, a plan related to investment choice is considered to be more beneficial as compared to the defined pension plan. It is mostly because employer & employee can adjust their contributions in the plan related to investment choice according to the prevailing inflation rate. As far as the defined benefit plan is concerned, the amount remains the same irrespective of the inflation level prevailing in the country.
Recommendation for Selection of Plan:
Selection of plan depends upon different factors which have been disclosed above, but one of the most significant factors is employment ideas for the employee in the organization. If the number of employment years is less than the defined, pension plan is more beneficial as it is beneficial during the early stages of employment. If the tenure of employment is large, then plan related to investment choice can be considered more appropriate and beneficial for the employee of tertiary-sector as it is beneficial during the last stages of employment. It is important to make sure that an employee selects a plan according to the above-disclosed factors.
Concept of Time Value of Money:
Time value of money is considered to be one of the most significant aspects related to the selection of a defined pension plan for plan related to investment choice by the employee working in the tertiary-sector organization. Generally speaking, with time, the value of money reduces due to the increase in inflation and money supply in the economy. The value of that defined amount at the time of retirement and at the time of starting employment would be significantly different. Mostly the value of money decreases with time. It suggests that time value 2 of Money related to planning related to investment choice would be beneficial as compared to defined plan because the plan related to investment choice amount will be provided to the employee continuously every month while defined plan amount will be provided to the employee in a lump sum amount (Valentine & Scott, 2011).
Taxes:
As far as the tax rate is concerned, the tax would be collected from the defined pension plan once at the time of being the amount by the employer to the employee after retirement. In the case of the investment plan, the tax would be collected by the government authorities every month when monthly payment will be paid by the employer to the employee. If the employee is willing to start any small business after retirement, then selection of a defined pension plan can be beneficial for that specific employee instead of selecting an investment plan. It is mostly because the tax will be collected once for all from the amount paid by the employer to the employee after retirement and net amount will be at the disposal of the employee for investment-related purposes (Jones & Catanach, 2015).
Retirement plan related to investment choice is considered to be beneficial in case of the time value of money as compared to the defined plan. It is mostly because the contribution made in the fund increases the retirement benefit associated with plan related to investment choice as compared to the defined plan.
Conclusion:
All the above analyses suggest that it depends upon the age of the employee, employment tenure of the employee and average salary of the employee to decide whether he should adopt defined pension plan or plan related to investment choice after his retirement from his employment. Time value of money is also another significant aspect which should be considered by the employee to formulate the final decision regarding the post-retirement benefit.
Generally speaking, the defined pension plan is appropriate and beneficial for employees having a short term of employment with the employer while plan related to investment choice is appropriate for the employee in case the employment tenure is long with the employer.
Factors like return on investment, risk related to return on investment, salary of the employee, age of the employee, employment tenure of the employee, interest rate related to investment prevailing in the market, guarantee related to return on investment, and other related identified factors are significantly important for employees working in tertiary-sector to make decisions regarding the selection of defined pension plan or plan related to investment choice.
Recommendation:
All the above analysis suggests that defined pension plan is appropriate in case of early retirement for the tertiary-employees working in the organization while plan related to investment choice is appropriate and suitable for employees associated with the organization from the long run. It is mostly because the tenure of employment plays a significant role in the plan related to investment choice as the payment is calculated every month and accumulated every month.
References
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