Quiz 2: Strategic Plan Design

Business

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Retirement plans prepared and provided by the employers serves as a benefit plan for various employees and as such these retirement plans are required to be prepared after considering various factors that directly or indirectly influence such benefits. Various environmental factors that are considered by an employer in designing retirement plans are- 1. Companies should take into account various matters of special category for designing such plans. 2. Feature or quality of the industry and employer serves as a background for determining retirement plans such as age of the firm, profitability, growth, competition, capital requirement etc. serves as an importance in determining and designing the retirement benefit plan. 3. Characteristics of employees also serve as a basis such as age, gender, employment period, salary etc. in determining the benefit plan. 4. Employer working with more than one form of industries needs to make consideration regarding different benefit program depending upon diversified business and its features. 5. The geographical location of the operations of the company also serves as a major factor as employer in rural region requires greater retirement benefit compared to urban employees. Apart from the one stated above, there are various other factors present that are required to be considered by the employers in determining the retirement plans design.

Assume an executive had been working for ABC Company from age 25 to age 55. ABC had a final average pension plan formula of 1 percent per year of service. The executive's final average salary at 55 is $70,000 and it is expected to increase to $90,000 at 65 (retirement age). If the executive remains with ABC, it is expected that the annual retirement benefit will be $36,000 (40 x.01 x 90,000). However if he or she leaves at age 55 it will be only $21,000 (30 x.01 x $70,000). Unfortunately, the difference of $15,000 per year would not be completely indemnified if the executive's new company offers the same type of benefit formula since it would provide only an additional annual benefit of $9,000 (10 x.01 x 90,000). Thus the executive would lose $6,000 per year unless the new company had a more liberal pension plan or provided some type of supplemental retirement plan for executives (discussed in Chapter 14).

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