An employee survey at a company indicates that many employees are unhappy with the retirement plan. They would prefer one that would result in employees being paid a fixed amount of money each month. What type of plan would better match the employees’ preferences? A. 401k plan B. 403b plan C. Individual retirement arrangements D. Thrift savings plan E. Defined benefits plan
The correct answer and explanation is:
Correct Answer: E. Defined benefits plan
Explanation (300 words):
The retirement plan that best matches the employees’ preference for a fixed monthly payment is the defined benefits plan. This type of retirement plan guarantees a specific monthly benefit at retirement, typically based on a formula that considers factors such as salary history and years of service.
Defined benefits plans, often referred to as pensions, offer predictability and security for retirees. Unlike other retirement plans where the final benefit depends on investment performance and contributions (e.g., 401(k) or 403(b)), a defined benefit plan promises a fixed, predetermined amount. This is exactly what the employees in the survey are requesting—a stable and predictable source of income after retirement.
In contrast:
- 401(k) plans (A) and 403(b) plans (B) are defined contribution plans. The amount employees receive in retirement depends on how much they and their employers contribute, as well as how their investments perform. These do not provide a guaranteed monthly payment.
- Individual Retirement Arrangements (IRAs) (C) are personal retirement savings plans with similar characteristics to 401(k)s, where income in retirement depends on contributions and investment returns, not a guaranteed payout.
- Thrift Savings Plans (D) are similar to 401(k)s but specifically for U.S. federal employees. They also do not offer a guaranteed fixed benefit.
A defined benefit plan (E) places the investment risk on the employer, not the employee. The employer is responsible for ensuring that the plan is adequately funded and can make the promised payments. These plans are becoming less common in the private sector due to their cost but are still used by many public-sector employers.
Therefore, Option E is the best match for employees who want a guaranteed, fixed monthly income in retirement.