Question

Grinders Manufacturing faces some tough questions as the organization moves to expand operations. The 75-year old company, with more than 400 employees, produces machine parts, and a new market opportunity will allow the company to expand operations and build a new facility. While Grinders is a business that has endured the test of time, the company has faced many challenges over the past several decades. At one point in the mid 1960s, the company had more than 800 employees. A strong employee union at that time established competitive market pay rates and a generous benefits package that included a traditional defined benefit retirement plan. However, through the 1980s and 1990s, Grinders faced declining sales along with increasing expenses. The company laid off nearly half of its workforce, and while it maintained operations, the company continued to struggle. A frustrated workforce eventually voted to decertify the union, and the plant now remains union-free. However, things seem to be turning around as the new market opportunity for Grinders holds the promise to build back its workforce.

As the company moves forward with its growth plans, Shane Meadow, Director of Human Resources, is examining all of the company’s HR management policies and practices to ensure that the company is prepared to meet the future challenges. Employee benefits are also under review, with the retirement plan under particular scrutiny as it is one of the most significant expenses for the company. Shane decides to begin his review by examining the company’s retirement plan to determine if the current plan is the most financially responsible plan for the company.

The defined benefit retirement plan set in place through union negotiations years ago is available for all full-time employees. However, the company’s declining sales and unstable financial situation have made maintaining the plan challenging. The current plan uses a unit benefit formula that calculates each employee’s retirement benefit based on years of service and pay. With many long-term employees, the company makes significant contributions to the plan each year to ensure that the promised benefits will be available. In addition to the financial impact of the plan, Shane has noted that as he hires new staff, they find the plan complex to understand.

Shane is considering transitioning to a defined contribution retirement plan, such as a Section 401(k) plan. His initial thoughts on this change are that the company would be better able to manage the plan financially, as the company contribution to the plan could be a profit-sharing plan that would base the company’s contribution to the plan on company profits. He feels this would lower the company’s financial risk in supporting the retirement benefit. If it provided a profit-sharing plan as part of a Section 401(k) plan, it would ask employees to contribute to the plan as well. Shane believes that asking employees to invest in their own retirement will help employees understand the value of their retirement benefits.

While the transition process of terminating the defined benefit plan and establishing a defined contribution plan would be complex, Shane believes at this point that it may be a good decision for the company in the long run. Further, the upcoming expansion plans provide a good opportunity to make such a change.

1. Based on the circumstances that Grinders Manufacturing is facing, do you think that Shane’s intention to move to a defined contribution plan is a good idea?

2. Who will the change benefit more, the company or the employees?

3. How will this transition impact the psychological relationship between the employer and its employees?

4. Are there any legal issues for this transition to keep both plans as qualified plans for Grinders Manufacturing?

Answer 1

Defined contribution plan is win win situation for both employees and employers as it is part contribution rrom both parties, helps employees generate higher returns, helps employees save contingency funds and also retain employees in lieu of higher compensation and benefits which also means better employment satisfaction and thus in turn it drives peak productivity and optimum performance.

Psychologically employees perceive employer as caring and future fit and makes them sustainable and retained for loyalty.

Legally both plans can be kept but must not violate existing norms liie the contribution limits of employees and employer and must comply to statutory regulations prescribed within each state of USA.

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