Compensation is a human resource tool that allows organizations to manage their employees. Organizations have to ensure that their compensation systems are not islands. Therefore, aligning the compensation system of the organization with the human resource strategy is essential. This is important to achieve success in the organization. A deferred compensation program (DCP) is an agreement that allows the state to postpone a portion of the employee’s income (Green 86). The origin of the DCP traces back to the need for a retirement savings plan for employees.
The deferred compensation board (DCB) manages the plan, which is instituted under the Internal Revenue Code. The participation is voluntary, with employers given the opportunity to choose from different fund strategies that allow for a rebalance of a portfolio. The DCPs differ for employees who work full time, half time or in regular partial employment such as nine or ten months. There are investment options, from which employers and employees are able to choose (Green 86). The current investment options, which depend on the close management of a portfolio such as market index, bond, and international funds, are bound to grow in future. Employees are intent on making more savings, meaning that DCBs will continue growing.
Today, most employers no longer offer compensation plans to support retired workers, preferring to offer the 401-k plan instead. The plan leaves employees in charge of their own retirement accounts. The 401-k plan issues its participants with plan information such as vesting rights, company match or participation rates [The Investment Company Institute (ICI) 1]. Compensation plans set minimum participatory standards as well as frequent change of investments by employees. An employee’s account is valuable depending on the amount contributed and the performance of investment options. Under the 401-k plan, employees are able to diversify their planned investments. Employees choose from the broad portfolio of investments that is available to them (Meeting Your Fiduciary Responsibilities n.d.). Job tenure is an important aspect of the 401-k plan, because it defines the vesting rights of employers.
The vesting rights influence how employees comprehend the compensation plan. Employees are unable to access the contribution that employers make immediately. Thus, a minimum number of years that employees work to gain vested rights to a portion or all of their benefits are instituted. For instance, a plan may require a two or three year service before achieving vesting rights. 401-k plans have distinct investment features such as available loans, which determine the employees choice of the plan. Additionally, contribution limits give employers 100 percent vested rights. Companies often require that employees are no less than twenty-one years old before they become members of a specific plan and vest their own interests. They should also have worked with the company for over a year (Meeting Your Fiduciary Responsibilities n.d.). Although a 401-k plan has several investment options for private sector employees, these factors govern their participation.
Employers are often challenged to take on the rewarding position of giving their employees retirement plans. Both the employer and the employee accrue benefits when such plans are in place (Meeting Your Fiduciary Responsibilities n.d.). To administer and manage the assets associated with the plan; employers have to take on particular responsibilities. Employers require knowledge of the rules associated with the plan, if they are to handle the responsibility of being a sponsor. Employers have to meet outlined standards of conduct if they are to manage the plans. Additionally, the employer takes on the position of a trustee tasked with handling different responsibilities (Meeting Your Fiduciary Responsibilities n.d.). For instance, employers must designate a trustee to ascertain that all contributions are met.
Where salary deductions cater for the retirement plans, employers are tasked with the responsibility of making timely deposits of the contributions. Employers only take on this responsibility if they are able to handle them. This responsibility falls on the trustee, if the rules are silent on who should handle the task. Another responsibility of employers is the expectation to report the activities of the plan to relevant government agencies. The retirement plans require employers, who are the administrators, to give plan information to the participants as well as their beneficiaries. The employer communicates and gives annual reports to participants (Meeting Your Fiduciary Responsibilities n.d.). Employers communicate any disclosures to the participants as well as the public since those who fail to file reports face penalties.
Similarly, the employee has different responsibilities towards a retirement plan. The employee is tasked with contributing money to the retirement plans, in options where there contributions are not deducted from salaries. Employees also have the responsibility of contributing money from their paychecks before they are taxed (ICI 1). The employees have the responsibility of deciding the investment for their share of contributions. Employees choose investments depending on the offerings of retirement plans. They have the option of diversifying their investments in a particular investment category before making decisions on the available alternatives (Meeting Your Fiduciary Responsibilities n.d.). Employees change investments based on investment information that they receive from service providers or their employers.
Employees retain the responsibility to select and monitor investment alternatives in a plan. They are also responsible for following a formal review process to determine their replacements or to use the existing service providers (ICI 1). Employees are to follow the guidelines of the plan and to make sure that they understand their responsibilities regarding the plan. Another important responsibility is evaluating the levels of fees if they are reasonable, before agreeing to contribute. Employees monitor the fees and expenses of the plan where laws fail to specify the required level of fees (Meeting Your Fiduciary Responsibilities n.d.). Monitoring allows employees to compare the services offered and those the estimated fee covers. Since all services have costs, employees have to specify the services, in which they would like to participate. Last, employees have to read the provided reports, to gain knowledge of the actual fees charged, their policies, and practices.
Last, as the administrator, it is important to inform you of the saddening low rates of participation in the 401-k plan. Most of the employees have completed more than one year of service with the company but are reluctant to joining the plan. The management, through the administrator, urges you to increase your participation in the plan, given the numerous investment opportunities that are available today. All the contributions of the employees are 100% vested and when employees leave employment, they remain entitled to deferrals. The investment gains on the deferrals means that all employees have to make significant contributions according to the vesting schedule. The company is carrying out the annual test on contributions, and this is the opportunity for each employee to know which 401-k plan is a safe and healthy investment. Questions, which relate to the accounts, are answered in each employee’s copy of the annual reports. The company urges each employee to consider their fiduciary responsibilities towards the 401-k plans.
Bibliography
Green, Scott. Sarbanes-Oxley and the Board of Directors: Techniques and Best Practices for Corporate Governance, New York, US: John Wiley & Sons, 2005. Print.
Meeting Your Fiduciary Responsibilities 2015. Web.
The Investment Company Institute 2006, The Federal Thrift Savings Plan: A Model for the Private Sector? PDF file. Web.