Hiring People_ Recruit and Keep the Brightest Stars - Kathy Shwiff [30]
The Pension Plan
As more and more U.S. companies are forced to focus on the bottom line, pension plans are coming under fire. Many organizations are switching to 401(k) plans, which are less expensive than traditional pension plans. As a hiring manager, you need to be aware of what’s out there and understand how your plan compares to others. You will also need to be able to explain your company’s pension plan to job candidates. In fact, if your program is a good one, you’ll want to make a point of emphasizing its strengths when highlighting company benefits to a strong job contender.
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“It is easy to be penny wise and pound foolish with respect to benefits that can save employees considerable time and improve their health and productivity.”
—Sergey Brin and Larry Page, founders of Google
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There are three basic types of pension plans: traditional pension plans, which are broken into two categories, “qualified” or “nonqualified,” and the new cash-balance plans, signed into law by President George W. Bush in August 2006.
Qualified pension plans. With a traditional pension, when employees retire, they typically receive a monthly payment for the rest of their life. Employer contributions are tax-deductible, and inside the plan, the money grows tax-free since employee contributions are not taxable until the funds are distributed, which is usually at retirement age, when employees are likely in a lower tax bracket. Qualified pension plans fall into two categories—defined benefit plans and defined contribution plans—both governed by legislation.
In a defined benefit plan, retired employees receive a fixed amount, based on age, salary, and number of years with the company. The amount of the benefit grows slowly at first, then rises sharply as the worker ages, earns more money, and puts in more years with the company. While defined benefit plans formerly covered roughly 40 percent of the work force, today they cover less than 20 percent.
Employees contribute to their pension accounts in a defined plan, therefore assuming a share of the investment risk. Some employers also contribute to defined plans, usually by matching some or all of the employee’s contribution. A 401(k) is a defined contribution plan.
Nonqualified pension plans. Nonqualified plans are designed to provide deferred compensation for executives and high-level employees. These plans don’t earn the tax breaks available for qualified plans, however, and the company’s payments into the plan are not income tax-deferred until the actual compensation has been paid out, which could be years away. The famous “golden parachute,” in which senior or key employees are promised compensation in excess of their salaries if control of the corporation changes, is a nonqualified pension plan. Another variation is the “golden handcuff,” where employees earn supplemental retirement benefits by remaining with a company for a specific amount of time or until reaching a certain age.
Cash-balance plans. The recent federal legislation is expected to encourage more companies to shift to cash-balance plans, a hybrid that combines features of both traditional pension and 401(k) plans. Each year an employer contributes a certain percentage of an employee’s salary to an account, and guarantees that the account will grow annually by a fixed amount or at a variable rate tied to a financial benchmark, for instance, one-year Treasury Bills. Employers are responsible for investing the funds in a cash-balance plan, which is federally insured against loss. When workers leave the company or retire, they can take the balance in a lump payment and roll it over into an Individual Retirement Account or they can choose an annuity that provides a guaranteed monthly income for the rest of their lives. Supporters of cash-balance plans insist they make the most sense, especially in the current job climate, where few people stay with one company long enough to accrue a traditional pension.
Time Off
It’s important to review time-off benefits with your candidate. Even office superstars