Question

Should a company that wants to retain older workers consider an actuarial increase for those who work beyond normal retirement age? Is the benefits model relevant here? Think about the factors that are used in calculating a formula-based DBP.

Answer 1

Yes, a company that wants to retain older workers should consider an actuarial increase for those who work beyond normal retirement age. Defined benefit models cannot be more relevant for this group of employees for a company.  

A defined benefit plan (DBP) is an employer sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of the employment and salary history. The company is responsible for managing the plan's investment and risk and will usually hire an outside investment manager to do this. Typically an employee cannot just withdraw funds as with a 401(k) plan. Rather they become eligible to take their benefit as a lifetime annuity or in some cases as a lumpsum at an age defined by the plan's rules. In the United States 401(k) is a tax qualified, defined. contribution pension account defined in subsection 401(k) of the Internal Revenue Code.

An actuarial increase is sort of the opposite of an early retirement factor, which reduces the benefit being paid over a shorter time frame . The amount of benefit increase the pension fund member receives calculated based on actuarial assumptions in case of deferrred retirement.

There are typically three methods used for calculating a pension payout from an employee's defined benefit plan. A flat benefit forrmula is one method for calculating a pension payout from an employee's defined benefit plan. In a flat benefit formula, the employer multiplies an employee's months or years of service by a predetermined flat rate.

Another method is referred to as unit benefit method which takes into account both the length of the employment as well as the employees salary.

Third method is referred to as variable benefit formula. This formula is tied to market performance. While the typical defined benefit plans offer a set return every year, in this case, the benefit will fluctuate due to fluctuations in the market.

The factors used for calculating a formula based DBP are employees months or years of service. Typically a predetermined flat rate is used for calculation. In unit benefit formula, both length of the employment and salary is taken into account. Variable benefit formula is linked to the market. Market performance defines the benefit.  

Conclusion : Defined pension plans are so crucial to a lot of workforce and clarity in the retirement benefits is important. The years of their lives they have worked hard for should be an investment for their comfortable retirement lives for themselves and their loved ones.  For a company thinking of retaining older workers have another benefit of having very experienced and learned workforce to assign the task. Attracting benefit plans can be offered to the older employees.