Saving for the future

One of the most effective perks you can offer your employees is a pension or retirement plan. Not only does this help recruit and retain good employees, but it also encourages them to save for their retirement while offering several tax advantages — for both you and your staff members.

But getting your employees to participate requires more than simply letting them know it’s available, says Pete Gautreau, a partner at accounting firm Vicenti, Lloyd & Stutzman LLP.

“It’s an educational process which heightens visibility that is effective in bringing more people to participate in the plan,” he says. “And the more people that participate, the better off everybody else in the company is who wants to save.”

Smart Business spoke with Gautreau about pension plans, how 401(k) plans have provided employees with greater control of their financial future and what can be done to encourage higher participation in company-sponsored plans.

The number of benefit plans is large and constantly evolving. What advice would you give to companies about selecting pension plans in the current landscape?

The first piece of advice would be to determine if and which type of a pension plan provides the most value to the company for those who wish to participate. A cost-benefit analysis should be done. Most companies determine that a plan is of value, and therefore, if they’re going to determine what type of plan to make available to their employees, I would certainly advise that the company hire a third-party independent investment professional that can help them through the selection process.

Many times when a company chooses to institute a 401(k) plan, for instance, the selection process turns into a dog and pony show with various providers offering the latest and greatest. You need a professional, especially on the investment side, to help analyze the costs involved, the fees, and also be responsible to conduct due diligence that is necessary to ensure that the selection of investment options covers a broad array of choices.

What is the difference between a defined benefit and a defined contribution plan?

A defined benefit plan is a plan in which benefits are definitely determinable. For instance, one in which a participant would receive, say 30 percent, of monthly compensation for the rest of his life after he retires. So he knows what benefit will accrue to him starting with retirement and ending with his death. A defined contribution plan is one that provides an individual account for each participant and that account accumulates his contributions, the employer’s contributions, earnings and incurs fees.

How important are pension plans in helping to attract and retain key employees?

They can be very important or not important at all. Let’s say in a manufacturing sector where the vast majority of employees are blue collar and not highly paid, putting away for retirement is not that attractive to them. And if they don’t participate, the executives of the company are limited in their ability to participate, so therefore, the plan itself might not be seen as a great benefit. On the other hand, for more professional service companies, those with more white-collar flavor, it’s very valuable because people are more cognizant of their obligation to put away for retirement. As more people participate in the company, the more everyone can put away.

What kind of tax advantages can businesses enjoy by contributing to their employees’ retirement?

The company gets a tax deduction for the amount it funds in a pension plan. That funding can actually occur more than nine months after a year ends as long as the contribution is funded by the company before it files its tax return. It can get a deduction that’s actually not paid until the following year. Plus, all the fees and costs involved in maintaining the plan are deductible.

How has the advent of 401(k) plans changed the structure of pension plans?

The employees are now more responsible for their retirement savings and they’re also afforded more options and security. The responsibility lies in the fact that participants now can determine how much to put away, how to spread their investment, if they want to diversify, if they want to increase their risk, if they want to be safe. They’re really more in control of their own destiny, whereas those participating in the older, more traditional defined benefit plans are discovering those retirement benefits might not be as secure as they thought.

Saving among Americans is very low. What can an employer do to encourage employees to participate in company plans?

Number one, they can offer a match, meaning that the employee will receive a contribution from their employer into their account based on a matching/percentage formula. The educational process is critical. The plan should be publicized. The employer needs to give frequent opportunity for employees to learn about the plan. This can be done by bringing in the investment provider servicing the plan and offering quarterly or semi-annual enrollment and educational meetings. It’s also effective to post results of the funds in the pension plan in a common workplace area in which employees can see, normally through graphs and schematics, how their savings are growing.

Pete Gautreau is a partner at accounting firm, Vicenti, Lloyd & Stutzman LLP. He heads the commercial business division. Reach Gautreau at (626) 857-7300 or [email protected]