Retirement Planning
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Creative Games Corp has a contributory retirement plan in which 5% of the employees' annual wages is 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.
Although United Manufacturing has a min retirement age of 60, it provides an extension period of 5 to 6 years before compulsory retirement. Employees (full time, hourly, or salaried) must meet participation requirements. Further, in contrast to the Creative Games plan, the United Manufacturing program has a noncontributory feature. Annual retirement benefits are computed according to the following formula: 2% 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 Creative Games and United Manufacturing.
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 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.
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1. Discuss and contrast the features of the retirement plans offered by Creative Games and United Manufacturing.
The features of the plan offered by Creative Games and United Manufacturing differ in several ways. First Creative Games has a contributory plan in which the employee's 5% wages are deducted, the employer contributes a matching amount equal to the employee contribution. On the other hand United Manufacturing does not make deductions from the salary of employees; instead it pays 2% of the employee's final annual salary for each year of service with the company. In case of United Manufacturing, the employees must comply with participating requirements.
The other difference is that Creative Games uses a five year graded vesting procedure. In other words this means that Creative Games will vest 20 percent of the contributions each year over a period of five years. This method is also called graduated vesting. In case of United Manufacturing there is immediate vesting.
Again there are differences in retirement age for Creative Games and United Manufacturing. In case of Creative Games there is a normal retirement age of 60 years. On the other hand in case of United Manufacturing there is a minimum retirement age of 60 and provides for extension periods of 5 to 6 yeas before compulsory retirement.
2. Which ...
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