Linda Calloway and Meredith Perdue, aged $30,$ are neighbors in Charleston. Linda works as a software engineer for Progressive Apps Corporation, while Meredith works as an executive for Industrial Container Company. Linda and Meredith are interested in better understanding their pension and retirement plans.

Progressive Apps Corporation, the company where Linda works, has a contributory plan in which $5$ percent of the employees$$ annual wages is deducted to meet the cost of the benefits. The firm contributes an amount equal to the employee contribution $($i$.$e$.5\%$ of annual wages$).$ The plan uses a five$-$year graded vesting procedure; it has a normal retirement age of $60$ for all employees, and the benefits at retirement are paid according to a defined contribution plan.

Industrial container, where Meredith works, has a minimum retirement age of $60.$ Employees $($fulltime$,$ hourly, or salaried$)$ must meet participation requirements. Further, the Industrial Container program has a noncontributory feature. Annual retirement benefits are computed according to the following formula: $2$ percent of the employee$$s final annual salary for each year of service with the company, is paid upon retirement. The plan vests immediately.

Assume that the annual salary on average for Linda and Meredith is $$100,000.$ Also suppose that the contributions by Linda and the salary percentage deducted $($for Meredith$)$ are invested at a market return of $6\%.$ Using the table provided below, calculate the retirement funds for each employee and then answer the following questions.

Which of these two would have higher returns at the retirement age of $60.$ Use the future value for Linda $($contributions per year invested$)$ and PV for Meredith

$($funds at the end of $30$ years$),$ since we want to compare their relative returns at age $60.$

Which plan is riskier? Why?

Plan feature Progressive Apps: Linda Industrial Container: Meredith

Type of Plan Defined Contribution Defined Benefit

Contribution by employer $5\%$ of annual wages

Contribution by employee $5\%$ of annual wages

Vesting $5$ year grading vesting procedure The plan vest immediately

Benefits

Years in service

Salary

Investment return

FV of accumulated funds for Linda and PV for Meredith using annuity