1. Understanding Your Employee Benefits: Investing in Your Retirement After nearly three months at your new job, you believe that you have a good understanding of your responsibilities, as well as the benefits of working at your company. However, you just received a letter from HR informing you of the opportunity to participate in the companys retirement plan. Under company policy, you can begin participating in the retirement plan after 90 days of service. As you review the informational letter, you realize that you are faced with some important decisions about saving for retirement. The company offers employees the opportunity to participate in a Section 401(k) plan. The company will contribute to the savings plan on your behalf, but you must first elect to defer some of your annual income into the plan. The informational letter outlines the details of the Section 401(k) plan. You can defer up to 10 percent of your annual pay to invest in the plan. The salary deduction agreement allows you to defer your pay through a pretax payroll deduction from your pay each pay period. The company contribution to your retirement savings is a match of what you contribute; thus, you must first decide to defer some of your income into the plan. The company policy is to match 100 percent of what you set aside, up to the first 5 percent of your annual pay. Thus, for example, if you set aside 2 percent of your pay, the company will invest the equivalent of 2 percent of your pay. If you invest 5 percent of your pay or more, the company will invest the maximum match of 5 percent of your pay. You know that retirement savings is important, so your initial reaction is that you should participate in the plan and set aside the maximum deferral of 10 percent of your pay. However, as you look at the numbers, you have some concerns. Your current pay is $1,500 per pay period, with 24 pay periods each year. If you invest the maximum of 10 percent of your pay, you will have $150 deducted from each pay, leaving you with $1,350. After tax and health-care insurance deductions, your take-home pay will be around $800 each pay period. As you consider your expenses, you worry that your take-home pay wont be enough. With a pile of bills, including rent, utilities, a car payment, and other expenses such as food and entertainment, you see that you will need to stretch your paycheck quite a bit. This concern over paying your bills makes you question deferring the full 10 percent of your pay. While you know that you should start your retirement savings now, you have at least 40 years until you retire. As you review the letter, you learn that you have a week to make your decision. You must first decide whether or not to participate in the plan, and if you do, you need to page 124decide how much of your pay to defer each pay period. Further, you will also need to decide how to allocate your contributions to the plan. The letter discusses several investment options that include high-risk mutual funds as well as lower-risk federal government bond funds. You decide to take advantage of an upcoming informational meeting mentioned in the letter to learn more, and you start to think about your options.

Do you think that you should defer part of your pay to invest in the Section 401(k) plan? If you choose to invest, what percentage of your pay would you defer to the Section 401(k)? Why?

2. Reconsidering the Vesting Schedule at Syntax Software Software companies commonly see high employee turnover. Professionals such as software programmers, graphic designers, and other talent in the industry are highly sought after and are often open to new challenges. Syntax Software is recognized regularly as a great place to work but faces the same turnover problems that plague the industry. While the company has many long-term employees, in the past five years the company has struggled in particular to retain new software programmers and graphic designers. The company has over 1,000 employees but, within the rank of software programmers and graphic designers, those joining the company most recently have stayed on average a little less than two years. The Director of Human Resources (HR) is examining all aspects of the workplace including the organizational culture and overall compensation offerings looking for opportunities to positively impact employee retention. As part of this effort, Joe Harris, the Director of Benefits, is reviewing the companys employee-benefits program. Joes initial findings suggest the benefit program is very similar to the programs offered by competitors. The company provides a generous paid time off program, employer-sponsored health-care insurance, and a 401(k) plan as a retirement benefit. He has determined that the companys paid time off benefits and health care insurance offerings are in line with what the competition offers. His next step is to focus on the 401(k) plan. Joe has determined that the employers contribution to the 401(k) plan is about the same, if not better, than most competitors. Employees can choose to participate in the plan upon hire and can contribute up to 6 percent of their annual pay to the 401(k) plan, and Syntax offers a full match. However, he noted that the vesting schedule that Syntax Software has for the 401(k) plan differs from most of the companys competitors. Syntax has a six-year graduated vesting schedule. After two years, employees vest in 20 percent of the Syntax contribution to the plan, and receive an additional 20 percent vesting each year, culminating in 100 percent vesting after six years of participating in the plan. Joe found that many competitors have a cliff vesting schedule, with employers granting 100 percent vesting after three years of service. Joe is now considering if the cliff vesting schedule might be a good shift to recommend to the Director of Human Resources. Given that many employees leave around the two-year mark, they are able to take 20 percent of the employers contribution to the 401(k) program with them when they leave. He is aware that a graduated vesting schedule is often more preferable to employees who intend to change jobs often. However, he noted that the cliff vesting schedule could create an incentive for employees to stay at least three years, given the significant difference in the vested interest in the 401(k) plan. Joe knows that once an employee gets beyond their first few years of tenure with Syntax, they are more likely to stay longer. However, he is unsure if the cliff vesting schedule page 125would make a difference to employees who might receive offers to leave Syntax. He decides to take what he is learned to the Director of HR for further discussion.

Assuming an employee is making $50,000 and contributes the full 6 percent to the 401(k) plan, what would be the total amount the employee would have a vested right to if they left the company after three completed years of employment under the current graduated vesting schedule? If the company shifted to the cliff vesting schedule, what would the total amount be? Should Joe recommend shifting to the cliff vesting schedule? Why or why not?