Instructions: For the following two cases complete the related questions following the case.
Case 13-1. Defined Benefit Retirement Fades Away
Defined benefit retirement plans appear to be going the way of the dinosaurs. According to the Bureau of Labor Statistics, in 2011 only 20% of all private employees had access to defined benefit retirement plans, while 58% had access to defined contribution plans. This shift is also apparent in the amount of money being managed in each type of retirement plan. In 1985, approximately 65% of all retirement savings were held in defined benefit accounts and only 35% were in defined contribution accounts. In 2005, the percentage had almost reversed to 60% in defined contribution accounts and only 40% in defined benefit plans.
And this phenomenon is not only part of the business landscape in the United States. Companies around the world continue to shift from defined benefit to defined contribution plans. According to the Canadian Press, the Royal Bank of Canada “is just the latest Canadian company” to end its defined benefit plan for new employees. In the past 10 years, defined benefit plans also fell from about 97% to 60% of all pension funds in Britain, with defined contribution plans taking up the slack.
There appears to be several reasons for this shift. Among them is the fact that defined contribution plans shift the financial risk associated with funding employee retirement from the employer to the employee. The amount paid in retirement is based on the performance of the invested funds over the period of investment instead of being a fixed dollar amount. In addition, moving a defined benefit retirement account from one employer to another is virtually impossible, but defined contribution plans are basically designed for portability.
Companies, of course, are touting the value of defined contribution plans to their employees. They tell employees about defined contribution plans being more portable than defined benefit plans, so for those who will change jobs a number of times in their careers, a defined contribution plan is better. The risk of the employer underfunding the plan also disappears with a defined contribution plan, because the plan is funded directly over time in an account set up for each individual employee. Companies remind employees that defined benefit plans that are underfunded might not be there when the employee actually retires and the Pension Benefit Guaranty Corporation only guarantees a basic retirement benefit–not 100% of what was promised by the employer. Defined contribution plans also typically have much more flexibility in how the money is invested and managed over the life of the fund and the individual has direct control over this investment process, unlike defined benefit funds.
On the other hand, many employee associations, unions, and even some academics say that companies have been allowed to pull funding from their defined benefit plans that they knew would eventually be needed to fund employee retirements and that this is the reason that defined benefit plans are having difficulties. Ellen Smith, a Wall Street Journal reporter, says that employers have “plundered the nest eggs of American workers” using their retirement funds as corporate piggy banks. Olivia Mitchell of the Wharton School at the University of Pennsylvania says that companies pulled funds out of their retirement programs in the mid-1980s because of the significant increase in the stock market during that period. When stocks started to take hits to their value several years later, the companies didn’t refund their retirement plans, which left them in serious danger of being underfunded when needed.
Opponents to defined contribution plans strongly argue that defined benefit plans are more valuable to the worker because of the guaranteed benefit upon retirement. Since these plans provide a guaranteed income to the worker, it is easier for the employee to plan for their eventual retirement. The employee groups point to the fact that most defined contribution plans have not gained any significant value over the past several years because of the stagnant stock markets worldwide. As a result, employees who put money into such accounts expecting the historical average return on their investment of about 7% have seen virtually no growth in their retirement accounts, and in some cases significant declines in the invested monies. Defined contribution accounts may also be subject to inflation risks, which can reduce the actual amounts available in retirement. Finally, many employees choose not to participate in defined contribution plans, and for the ones who do, most are not capable of directly managing their funds with as much success as professional investment managers.
Questions
1. Which side are you on in the debate–should companies be allowed to discontinue existing defined benefit plans or not? Explain your answer.
2. If you were the benefits manager for a large national bank, which defined contribution plan(s) identified in the text would you consider as options for your workforce? Explain your answer.
3. As the benefits manager, what would you need to do to ensure that the retirement plan you chose would have value to both the company and the employees?
Case 14-1. Workplace Safety, Health, and Security
Nike: Taking a Run at Fixing Outsourced Worker Safety
During the past two decades, manufacturing companies have relied more than ever on low-wage workers in the Far Eastern countries as an alternative to high U.S. labor costs in order to remain competitive in world markets. However, these multinational companies have been criticized for their insensitiveness toward their subcontracted employees’ working conditions. A Bangladeshi minimum wage of about $38 a month is appealing to major corporations as it helps them expand internationally at low cost, about $1 trillion in 2014. However, Bangladesh’s worker safety record poses a big threat to the reputations of the companies that conduct business in this country. Even the companies that effectively made efforts toward improving the safety conditions are now at risk as the problems in Bangladesh are widespread and rising throughout the garment industry–case in point, the footwear giant Nike.
In 2014, Nike was worth $66 billion, manufacturing their goods in more than 740 factories worldwide with sales of $24 billion. Founded in 1971, Nike became the industry leader in designing and manufacturing shoes, apparel, equipment, and accessories because they manufactured high-quality, high-priced goods with low-manufacturing costs. These costs were kept low by contracting overseas low-cost labor, an idea that the co-founder and chairman of the company, Philip H. Knight, came up with when he was pursuing his MBA. Nike set the industry trend for outsourcing manufacturing; back in 1971, 4% of U.S. footwear was made overseas, but as of 2014 that rose to 98%.
Nike grew rapidly in the 70s with their strength in high-quality, low-cost products, but soon became a target for protestors. In the 1990s, many consumers rallied against Nike’s horrendous overseas factory work conditions. As stated by the press, Nike took no responsibility for these factory employees’ at-work surroundings by stating that since their manufacturing was outsourced and they did not own these factories, they therefore could not be held accountable for the safety problems or the labor conditions of those workers.
Mere protests that began with Nike’s sweatshops in the early 1990s continued up until the two fatal incidents that took place in Bangladesh. In November 2012, 112 workers were killed by a fire in a Nike-contracted factory because they were trapped behind locked doors. Then in April 2013, another 1,129 deaths occurred after an outsourced factory collapsed on top of its workers due to an unstable infrastructure. Companies who outsourced production overseas to these factories did not accept responsibility for their actions (except for Walt Disney Co.); these firms claimed that they were in fact surprised to see that their branded apparel was found in the factory rubble. These calamities epitomized the worst characteristics of subcontracting and indicated the need for a thorough overhaul of the entire industry, including factory owners, labor unions, and related government agencies. The Bangladeshi garment association met with the representatives of these firms to discuss a solution strategy; however, only two major brands were willing to sign any agreement. The rest of the companies found it too costly to implement the suggested changes and decided to fix the problems on their own.
Nike fortunately implemented their own work safety program even before the incidents had occurred, Project Rewire. This program gave Nike control over their subcontracted employees’ work environments. Initially, Nike started by removing hazardous materials, such as toxic solvents and molecular gases, from their products, thereby reducing possible exposure to health issues. This also targeted their concern about global warming and the environment. They then examined their supply chain in order to minimize worker safety issues. They eliminated excessive overtime for factory workers, increased the hours of safety training, and reevaluated their contracts with the factories and continued doing business only with those businesses that were committed to its workers’ safety and the environment.
Nike isn’t “doing it” just yet. The Worker Rights Consortium, a nonprofit group partially funded by universities that monitor factories producing college athletic gear, has published reports on 16 of Nike’s suppliers since 2006 alleging violations of overtime and worker abuse. In August of 2013, the Consortium sent an e-mail to Nike asking why it didn’t take action after it was told one of its suppliers in Bangalore, India, didn’t raise wages for its 10,000 workers after a government-mandated increase. A Nike spokeswoman confirmed the factory failed to comply with wage rules and said workers were compensated later.
Questions
If Nike was manufacturing their products in the United States as they were in outsourced overseas factories, which OSHA laws would have been violated?
In terms of Employee Wellness Programs, how did Nike improve working conditions for overseas employees?
What ergonomic principles might be applied to factory working conditions to improve operational settings and reduce employee stress?
Project Rewire represents a major commitment by Nike to improve outsourced employee working conditions, what more should they do in your opinion to increase workplace safety of these factory workers?