Why DC Plans Serve the Modern Workforce BetterBy: Meera - Jun 26, 2018
Today's workers, especially corporate employees, are more likely to change several jobs during the course of their careers. This is a significant shift from a few decades ago, when workers spent practically their entire careers in the same organization. Recent statistics indicate that employees are likely to switch 10 jobs or more in a career spanning four decades. Present-day workers move from one job to the next for reasons such as better compensation, lack of recognition, relocation, creative fulfillment and, sometimes even opt for a less stressful role.
According to data from the U.S. Bureau of Labor Statistics, the average employee tenure with their employer was 4.2 years (January 2016). Less than a third of the workforce have been with their current employers for 10 years or more. Median employee tenure is generally higher among older workers than in younger ones - for example, the median tenure of workers between the ages of 55 and 64 (10.1 years) years is more than three times that of workers between the ages of 25 and 34 years (2.8 years).
In this context, Defined Contribution (DC) plans offer employees the advantage of portability - the U.S. employee’s right to maintain certain benefits when they switch employers, leave the workforce or retire. Defined Benefit (DB) plans usually provide benefits at retirement based on the years of service.
Portable benefits can be transferred to the new employer’s plan or to an individual who is leaving the workforce. For example, balances in a 401(k) plan can be rolled over into to the next employer’s plan.
A rollover or a transfer of assets from a retirement plan maintained by a former employer to another retirement plan can take place in more than one way. Employees can opt to transfer assets from one plan to the same type of plan - for example, from a 401(k) plan to another 401(k) plan. They could opt for a direct rollover - transfer the assets from one type of retirement plan to another type of plan. In an indirect rollover, the participant can withdraw the money but the transaction is tax-free only if the assets are transferred to another plan within 60 days.
The worker could move to a company engaging the services of the same plan administrator hired by the previous organization; some administrators allow the plan participants to roll over the assets in-kind without having to liquidate, and then invest again, thereby minimizing risk. The participant can also opt to disinvest and move to a different plan. A rollover, if executed within the norms, is a tax-free transaction.
DC plans allow for contributions to be paid into individual accounts, which gives workers the option of taking the contributions and accrued benefits in their plan account to the next employer. Defined Contribution plans also allow the employee to adopt investment strategies based on their preferences.
Given the high rates of employee churn in organizations across the world, plan sponsors are increasingly moving to DC plans which offer greater flexibility both for the company and the employees.Disclaimer
Categories : Defined Contribution
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