Retirement plans enable employees and firms to set aside funds, on a tax-favorable basis, for use as an employee’s benefit upon retirement. Most retirement plans are defined by tax law and must conform to regulations to be qualified retirement plans.
As reported in the most recent PSMJ A/E Bonus & Benefits Survey, most employees place a high priority on understanding and funding their retirement plans. Recent publicity concerning the plight of many employees of Enron (and other large firms that failed) losing their entire retirement savings has caused most employees and firms to question their own retirement plans.
The most popular retirement plans
The federal government, mainly through the tax code, defines several types of retirement plans that provide tax incentives to both the firm and employees. The availability of these multiple plans allows most firms to choose from and offer a variety of different employee retirement plans. Since the federal government has very specific rules regarding both firm and employee contributions (among other rules), virtually all firms opt for one of the predefined government types of plans in lieu of creating their own unique plans. The most common plans being offered are:
• Defined benefit plans
• Defined contribution plans
• Profit sharing plans
• 401(k) plans
• Employee Stock Ownership Plans
• Simplified employee pension
• Simple employee retirement
• Keogh
Over the past 25 years, retirement plans have shifted away from the traditional pension-type arrangement with fixed company contributions (defined benefit or defined contribution plans). Lately, the most popular retirement plans are those through which the employee funds the plan with pre-tax income (401(k), IRAs, etc.) and the firm adds some amount of company contributions through profit sharing, matching contributions, etc. In addition, many firms offer their employees a choice of more than one type of plan.
Figure 1 indicates the relative popularity of the various retirement plans. It demonstrates this dramatic shift away from the more traditional pension (defined benefit and defined contribution) arrangements to the very popular 401(k) and profit sharing plans. A very popular type of retirement plan is a profit sharing plan (36 percent), often coordinated with a 401(k) plan in the form of additional company contributions or matching funds. A small number of firms indicate they have established an ESOP plan to provide employee ownership of the firm. Retiring employees have access to these shares in the firm to retain as investments and/or liquidate, as they so desire. The retirement plans that focus on small firms, such as Keogh, SEP, and SIMPLE are not appropriate for most firms, resulting in lower percentages being used-Keogh (1 percent), SEP(4 percent) and SIMPLE (6 percent)-and only 4 percent of the participants report they have no retirement plans in place.
Employer contributions to retirement plans
Employers are permitted to make separate contributions to many of the employee-funded retirement plans (e.g., 401(k) funds). Firms with employee funded retirement plans may elect to match all or some part of the contributions made by their employees. Contribution matches can be based on a percentage of employee salary or percentage match of the contributions made by employees.
As indicated in
Table 1, design firms indicate that they match employee contributions with an additional 25 percent or up to 4 percent of the employee’s salary. However, these percentages vary depending on the type of service offered by the individual firm.
A couple of final thoughts
Almost every design firm provides some type of retirement plan option for their staff employees. Only 4 percent of the firms report having no retirement plan benefit.
Employees are encouraged to make contributions to their retirement plans by the use of matching funds through firm-paid contributions. Matching contributions that equal about 4 percent of employee salary are a typical firm contribution. Unfortunately, not all eligible employees actually make contributions to their retirement plans and are ignoring this important benefit.
The firm’s expense for retirement contributions is equal to about 8 percent of the firm’s total employee salary, including both matching and voluntary employer contributions. Even though most design firms contribute additional funds to employee retirement accounts, this level of funding by professional design firms remains much less than reported by employers in other industries.
Ed Hannan is vice president of publishing at PSMJ Resources Inc. in Newton, Mass. Details can be found at www.psmj.com.
For more information on the 2009 PSMJ A/E Bonus & Benefits Survey, call (800) 537-7765 or go to www.psmj.com/publishing.