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Defined contribution plan. Under defined contribution plans, the employee, employer, or both contribute money each pay period into a retirement account set up specifically for the employee. The money is invested on the employee’s behalf. Upon retirement, the employee can begin drawing on the money in their account. A popular defined contribution retirement plan is the 401(k) plan . Employee contributions are paid in pretax dollars which has the added advantage of reducing the amount of income taxes the employee pays. Reflect on Learning: Retirement plans are important tools for building personal wealth. In fact, an entire later chapter is devoted to retirement and retirement plans. Can you explain the difference between a defined benefit plan and a defined contribution plan? What is an example of a defined benefit plan? Answer: pension. What is an example of a defined contribution plan? Answer: 401K. Vacation Benefits. Do you know there is no law requiring employers to provide paid or even unpaid vacation? Employers have full discretion when it comes to determining how much vacation time to offer and whether it’s paid or unpaid leave. The reality is, however, to attract employees, almost all companies provide at least two weeks paid vacation to their full time employees . In industries with a tight labor market, companies often offer more vacation time, either paid, unpaid, or a combination of both. Sick Leave. There is no law requiring an employer to provide paid sick leave to employees. However, companies of over 50 employees which are subject to the FMLA, must allow up to 12 weeks of unpaid sick leave. The fact is, it would be hard to attract employees without offering a few paid sick days. On average, most employers allow eight paid sick days per year. Life insurance. Life insurance is another popular but discretionary employee benefit. Life insurance provides money for a beneficiary, usually a family member, in the event that the employee dies. The goal is to replace the income lost as a result of the death of the employee. Some employers pay for a minimum amount of life insurance coverage and employees have the option of contributing more money to increase the level of coverage. Reflect on Learning: These are the types of employee benefits you most likely will encounter when you begin your career. While they are discretionary, meaning not required by law, most companies offer them to attract good employees. Can you list discretionary benefits? Medical (if under 50 employees), vision, dental, retirement, paid vacation, paid sick leave, and life insurance. In your opinion, which of these benefits is most beneficial to your personal quality of life? Other Discretionary Benefits There are other, less common employee benefits which may be included in a compensation package. These are completely discretionary, but you should be aware of them: Performance Bonus. This is a form of additional compensation paid to an employee as a reward for achieving specific goals or hitting predetermined targets , such as a sales target or beating a project deadline. Performance bonuses are often used as incentives to increase the productivity of employees working toward a specific goal. Performance bonuses are entirely discretionary and are more common in the financial industry, such as investment advisors and money managers. However, performance bonuses are even used in the agricultural industry as a means of encouraging workers’ efficient crop production. PRODUCT PREVIEW
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THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY
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