Case Study L: Sarahs Job Offers

Sarah Wood has just graduated from college and is considering job offers from two companies. Although the salary and insurance benefits are similar, the retirement benefits are not. Both employers have defined contribution plans and employees are free to direct how their plans are invested, but that is where the similarities end. Alpha Company contributes 3% of an employees annual salary. Employees are vested after three years using cliff vesting and it is not possible for employees to voluntarily supplement their contributions. Beta Corporation only contributes a match to an employees contribution. The match is 50% of the employees contribution up to 3%. Therefore, if an employee contributes 6% of their annual salary, Beta Corporation will contribute another 3%. Vesting in Beta Corporation happens over a graded schedule. Sarah is confused an unsure what to do so she turns to you for some advice.

Critical Thinking Questions:

Regarding vesting requirements, what is the difference between cliff vesting and vesting over a graded schedule?

Which pension plan would offer Sarah the greatest long-term potential? Explain your answer.