A retirement plan is one of the most important benefits you can offer to valued people in your organization. These plans not only enable you to reward long-time employees, but also encourage newcomers to sink roots and build a career with your company.
But make no mistake: business-as-usual company contributions retirement plans can be a costly luxury in a stormy economy. Given the option of cutting pension plan contributions or cutting employees, your choice should be clear. If you offer a defined benefit pension plan, the administrators of these plans can often “massage” the actuarial assumptions and allow you to temporarily reduce or skip your contributions to the plan.
Suppose, for example, that when the plan was established it was based on the actuarial assumption that contributions paid into the plan would yield an average annual return of 6 percent. If it turned out that the actual return on these contributions has been 12 percent, the company may be perfectly justified in temporarily reducing payments or skipping some contributions altogether.
Regardless of the actuarial justifications, however, cutting back on pension plan contributions may be preferable to other alternatives available to a struggling company.
We represent an advertising agency that was very successful for a number of years. During the good times, the principals shared the wealth by making very generous annual contributions to the company’s employee profit sharing plan.
When the recession hit and billings dried up, the agency continued to make substantial retirement plan contributions. Management believed that employees had come to expect these benefits, and that even a temporary break from the routine would prompt a mutiny among the troops.
Given the seriousness of the agency’s financial problems, we convinced the firm to reduce its retirement plan contributions by approximately 50 percent. As it turned out, there was no staff mutiny. The employees realized that the agency was struggling through a difficult period, and they took the attitude that 50 percent was still a lot better than zero, and it was far better than an outright salary reduction.
To be sure, there was a little grumbling after the reduced pension contribution was announced, but even the complainers recognized that many companies don’t offer any retirement benefits.
Indeed, a number of businesses have abandoned retirement programs in response to the shaky economy. In addition to eliminating annual contributions, these employers have also saved the often significant legal, accounting and other administrative costs associated with employee pension plans.
When the assets of a retirement plan are liquidated and the funds are dispersed to the participants, employees may then “roll over” that lump sum payment into an Individual Retirement Account. This way, no tax is imposed on the funds until they’re withdrawn from the IRA upon retirement.
When the assets of a retirement plan are liquidated and the funds are dispersed to the participants, employees may then “roll over” that lump sum payment into an Individual Retirement Account. This way, no tax is imposed on the funds until they’re withdrawn from the IRA upon retirement.
