During a question and answer session at a recent industry conference, a home builder asked Moody’s Analytics chief economist Mark Zandi for his thoughts about the labor
Should You Fund An Employee Pension Fund?
As builders struggle to retain staff, benefit packages appear to be playing a larger role in an employee’s decision to remain at or leave a job.
As builders struggle to retain staff, benefit packages appear to be playing a larger role in an employee’s decision to remain at or leave a job. Well-trained employees play such a vital role in a company’s success that many company owners see the expense of funding employee benefits as a long-term investment.
Like many builders, Scott Yonkman of Yonkman Construction in Oak Harbor, Wash., spent time considering whether to fund a pension plan for his employees. “It’s a lot like stepping into the dark,” says Yonkman, pointing out the uncertainty of not only the cost to his company, but also the time necessary to start and maintain a pension plan. Ultimately, he took that step into the dark, and he views it as a positive step for his company.
Whether by accident or design, pension plan legislation has left many people shaking their heads in bewilderment. Terms such as IRA, Roth, SEP, SIMPLE, 401(k), money purchase and profit sharing dot the landscape, and only an able practitioner can guide you through the maze.
Yonkman’s experience is probably typical, including his minimal personal involvement. Administrative details are left to his company’s bookkeeper, Jean Eastwood, who handles most questions regarding the pension plan and its operation.
Yonkman Construction is a $4 million to $5 million company with two components: new home construction and high-end remodeling. The company offers employees paid holidays, vacations, group insurance and a bonus plan. While em-ployees might stay because of the company’s stability and continued work flow, Yonkman realizes that employees in construction tend to move from company to company.
Starting about 1996, Yonkman and his brother, Greg, began considering a pension plan for their company. After two years of looking, they started a plan known as a SIMPLE individual retirement account, to be used by themselves and their employees. SIMPLE stands for savings incentive match plan for employees. A SIMPLE IRA is funded by mandatory contributions from the employer and voluntary contributions from employees.
Why a SIMPLE IRA? Yonkman says their financial adviser steered them to that plan, and it seemed to have everything they wanted. Specifically, it allows for flexibility in contributions by Yonkman Construction in the event of reduced cash flow.
In accordance with pension law changes for 2002, employees can tax-defer up to $7,000 of their salary. Yonkman Construction is obliged to match any employee contributions dollar for dollar up to 3% of an employee’s salary. Total cost to the company for its contribution in 2001: $14,000.
Plan start-up costs were negligible because no fees were due the plan sponsor, American Express. Eastwood says American Express charges $25 per year per employee to administer the plan.
And the plan flexibility helps. If cash flow is light, Yonkman can select a smaller matching contribution percentage 60 days before the next calendar year.
Yonkman sees continued pressure on even small construction companies to offer an increased number of benefits, though he doesn’t recall any employees leaving Yonkman Construction specifically for a better benefit package from another employer. Nonetheless, Yonkman said his builder colleagues were surprised when he started the pension plan, as they questioned how he could afford it.
The $14,000 contributed last year already has provided a return on investment, Yonkman says. “We believe in the long-term benefit of the program. We have a good reputation, our clients become our friends, and our customers are treated well by our employees.
Stan Ehrlich, a past president of his 550-member local builders association, is a personal financial adviser in Clinton, N.J. To comment on this story or pass along an idea for a future article, e-mail him at email@example.com.