A defined benefit plan is commonly known as pension refers to a retirement that is an account set up by the employer that promises payment one an employee retires. There are expensive as compared to a defined contribution plan and have seen a sharp decline in the past years. On the other hand, a defined contribution plan refers to arrangements such as 403 (b) or 401 (k) and requires the employee to make some periodic contributions. The defined benefit plan only requires one to work and conform to the basic eligibility rule such as staying for a specific duration in the organization.
Kisser et al. (2017) explain thatthe costly nature has prompted manyorganizations to scale down on the plans and recommend the setting of defined contribution plans where the employees bear the responsibility of making the contributions. The new arrangement means that the employees incur high costs paying for the defined contribution plans, but there is the security of payment upon retirement. Contrary to the defined benefit plan that is determined by the number of years one has been in a specificjob, the defined contribution plan is based on a particular percentage of the salary.
The shift means that many organizations will also avoid the cumbersome process of complying with tax policies and other legislation. The high regulatory burden in defined benefit plans means that employers would incur high cost thus lowering the profit levels. Begley et al. (2015) argue that the shift to defined contribution plans means that there is the possibility of negotiating the salary levels and other benefits without necessary being tied by the regulatory policies such as the U.S Employee Retirement Income Security Act (1974). An aging workforcewould pose a threat to the profit levels as it would mean that there is an equal increase in the accrued benefits.
While this can be dealt with using forecasting, there is the problem of creating a balance between the current value of discounted compensation and the ongoing wage parameters. The shift has the benefit of reducing the litigation risks, variations in the morale of the employees and many legal constraints. Cadman&Vincent ( 2015) infers that the changes also have the benefit of increasing labor mobility as the employees are not tied to a specific organization using the defined benefit plan. Since the introduction of the new defined contribution plans, there have been increased levels in the mobility and productivity of the workers. The argument rests on the fact that one can shift from one employer to another without affecting the defined contribution plans.
Begley, J., Chamberlain, S., Yang, S., & Zhang, J. L. (2015). CEO incentives and the health of defined benefit pension plans. Review of accounting studies, 20(3), 1013-1058.
Cadman, B., & Vincent, L. (2015). The role of defined benefit pension plans in executive compensation. European Accounting Review, 24(4), 779-800.
Kisser, M., Kiff, J., & Soto, M. (2017). Do managers of the US defined benefit pension plan sponsors use regulatory freedom strategically?.Journal of Accounting Research, 55(5), 1213-1255.
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