HRM textbook

440 PART 4 COMPENSATION
Firms such as Vanguard, Fidelity,
and others can establish online,
fully Web-based 401(k) plans
even for small firms with
10 to 50 employees.
Source: Fotolia LLC.
Furthermore, changing 401(k) providers can be grueling. 90 In addition to trustworthiness,
the 401(k) plan provider should make it easy to enroll and participate in the
plan. 91 Firms such as Vanguard, Fidelity, and others can establish Web-based 401(k)
plans with online tools such as an asset allocation planner even for small firms.
It s also crucial that employers monitor 401(k) housekeeping issues. For example, the
IRS recently reported the top 10 most common violations that 401(k) plans encounter,
including late deposits and incorrect employer matching contributions. 92
Under the Pension Protection Act of 2006, employers who sponsor plans that
facilitate both automatic enrollment and allocation to default investments (such as
age-appropriate lifestyle funds ) reduce their compliance burdens. 93 Post-2008
stories, like that of David, a 47-year-old engineer, suggest prudence. His adviser said
that if we saved very aggressively, I might be able to retire in my early 70s. Such
experiences underscore the need for employee education, or perhaps directing funds
into (relatively) prudent default investments. 94
OTHER DEFINED CONTRIBUTION PLANS The 401(k) plan is one example of a
savings and thrift plan. 95 In any savings and thrift plan, employees contribute a
portion of their earnings to a fund, and the employer usually matches this contribution
completely or in part.
As discussed in Chapter 12 (Incentives), employers use a deferred profitsharing
plan to contribute a portion of their profits in cash to a pension fund,
regardless of the level of employee contribution (income taxes on those contributions
are deferred until the employee retires or leaves the employer). An employee
stock ownership plan (ESOP) is a qualified, tax-deductible defined contribution
plan in which employers contribute stock to a trust for eventual use by employees
who retire.
CASH BALANCE PENSION PLANS One problem with defined benefits plans is
that to get your maximum pension, you generally must stay with your employer
until you retire the formula, recall, takes the number of years you work into
consideration. With defined contribution plans, your pension is more portable you
can leave with it at any time, perhaps rolling it over into your next employer s
pension plan. Without delving into all the details, cash balance plans are a hybrid;
they have defined benefit plans more predictable benefits, but the portability advantages
of defined contribution plans. 96 The employer contributes a percentage of
employees current pay to the employees pension plans every year, and employees
earn interest on this amount. 97