As part of recent contract negotiations, Peterson Corporation has presented two pension plan options to its employees. The employees are to vote on which plan they would like the company to implement. Peterson Corporation owns and operates a chain of grocery stores throughout western Canada and employs more than 3,000 people. Most employees have little education and very limited accounting knowledge. Your cousin, Karen Cooper, is a cashier at a Peterson store located in Kamloops, British Columbia, and she has asked you for help in determining which pension option to vote for. She is confused over the terminology used in the proposal and would like you to explain the two alternatives in simpler terms, so that she can make an informed decision.
Option 1
The company will establish a defined contribution pension plan. The company will contribute 10% of the employee's gross wages to the pension plan each pay period. Vesting will occur immediately and the funds will be placed with an independent trustee to be invested. Employees will have the option of contributing additional funds to the plan.
Option 2
The company will establish a defined benefit plan. The plan will guarantee that each employee will receive 2% of the average of their highest five years of salary multiplied by the number of years the employee works for the company. The plan will be fully employer-funded and the pension entitlement will vest after five years of continuous service.
Required:
Briefly explain to Karen the difference between the two pension plan options. You should remember that Karen is unfamiliar with pension terminology and you therefore have to explain some of the terms used in the plan descriptions.