Seven out of 10 civilian workers in the United States have access to employer-sponsored retirement benefits, according to 2017 data from the U.S. Bureau of Labor Statistics. Nearly 80 percent of employees with access to those retirement plans are participating in them.
In essence, a retirement plan is no longer a perk for full-time employees—they expect it as part of a standard compensation package. For SMACNA-member sheet metal and HVAC contractors, the realities of creating and administering a retirement plan for their non-bargaining employees, which include administrative, management, and executive employees, don’t differ significantly from other industries. SMACNA contractors want good retirement strategies and plans for their non-bargaining employees.
The upshot is that these programs offer employees “engagement and a sense of being a part of something,” according to Carol Duncan, president of Oregon-based SMACNA contractor General Sheet Metal.
“It's imperative to offer good health care and retirement benefits to overhead and administrative staff, many of whom are project managers and estimators,” says Scott Vidimos, president of Vidimos Inc., a sheet metal company based in East Chicago, Indiana. “These are key people in the organization. They are the face of the business and are tasked with bringing business in the door and running it profitably. Providing them a robust retirement plan emphasizes our support of the work that they do on a daily basis.”
To ensure that their retirement plans maximize the benefits to both the employers and their employees, sheet metal and HVAC contractors should take a number of considerations into account because the structure and parameters of a retirement plan can create points of differentiation for employees evaluating competing firms.
“The benefit helps in recruitment of quality employees and retention of quality employees,” says Jim Hall, president and owner of Waukee, Iowa-based HVAC company Systems Management and Balancing Inc. “It is also nice to know you are helping your employees reach a retirement goal.”
Defined benefit and defined contribution plans. For the most part, employer-sponsored retirement plans fall into two different buckets.
Defined benefit plans, such as pension plans, promise a specific monthly benefit. Some plans lay out specific dollar amounts for participants. More often, participants receive benefits based on a formula that includes a variety of factors, including years of service. These plans are more common for employees involved in collective bargaining, such as union craftspersons. SMACNA contractors ensure that their bargaining employees are well taken care of with these plans.
In defined contribution plans, which are more likely to be offered to non-bargaining employees, employees and their employers can contribute funds to an individual participant’s account. The funds in that account are then invested, and the participant eventually collects the balances in the account.
The most common type of defined contribution plan is the 401(k) plan. These 401(k) plans make up the vast majority of Americans’ employer-sponsored retirement plans: According to data from the Investment Company Institute, an association that represents regulated investment funds, a total of about 54 million U.S. workers participated in the 550,000 401(k) plans in 2015. In addition, there are several different kinds of employer-sponsored retirement plans such as 401(a) profit-sharing plans, 403(b) plans for non-profit organizations, and SIMPLE-IRA and SEP-IRA plans for smaller employers, among others.
“A 401(k) plan has become a standard offering for any competitive [compensation] package for professional people,” says Jim Morgan, president and CEO of Worcester Air Conditioning LLC, of Ashland, Massachusetts. “We need to offer it as a means to help people achieve retirement goals and to be competitive in the marketplace.”
Participants in these defined contribution plans have a dollar limit on the portion of their salaries that can be placed into the plan, and the deferred wages aren’t reported as taxable income. Participants in 401(k) plans can tailor the investments in their accounts to suit their own needs and timelines.
The profit-sharing approach. Additionally, employers can make contributions on behalf of all 401(k) plan participants and/or make matching contributions based on employees’ deferrals. The employer contributions are tax deductible, subject to certain rules.
Vidimos offers a profit-sharing plan that pays a share of an employee’s wages into an individual personal account. The company bases the calculation of the profit-sharing contribution on both an employee’s annual wage and individual performance bonuses.
The funds from Vidimos employees’ accounts are pooled together and split relatively evenly to be managed by two firms, one of which also manages its union employees’ pension plan. The plan allocates about 60 percent of assets to equities and 40 percent to fixed income investments. By law, all employees participate in the plan.
Building engagement. Payroll and insurance companies tend to be the service providers of choice for 401(k) plans with fewer than 100 employees. “Typically, these employers have payroll and insurance set up prior to the retirement plan, so going with one of these providers is a natural and convenient way to get started,” says Nathan Fisher, a senior vice president with Fisher Investments 401(k) Solutions.
Fisher notes that as firms grow in size, they generally take a more proactive approach to managing their 401(k) plans. He recommends a series of best practices designed to help employers understand costs, manage risk, identify the best 401(k) providers, and choose the right 401(k) investment options. They include measures such as benchmarking plans’ fees against peer companies, seeking out fiduciary training and outsourcing administrative responsibilities when necessary.
Western Allied Mechanical Inc., an HVAC contractor in Northern California, has more than 70 non-bargaining unit employees who are automatically enrolled in the company’s 401(k) plan at a 3 percent pre-tax deferral contribution unless they elect not to participate. Western Allied matches 50 percent of the first $3,000 that employees contribute to the plan, and the matching contributions gradually become fully vested over a six-year period.
Three Western Allied partners work with the company’s benefits provider, Great-West Life and Annuity Insurance Company, to manage the plan, which has a 97 percent participation rate, according to Western Allied’s president, Angie Simon.
“We do lots of education to get to this level,” she says. “We meet with all new employees and share how important it is to start saving for their retirement from the first day they are working with us.”
Those kinds of efforts to build engagement with employees are key to building participation in retirement plans, especially among younger workers, according to Fisher. He says employers can help educate employees and empower them to take a more active role in planning for retirement through steps such as setting up regular face-to-face meetings for employees with their service providers. Also, employers can offer their plan participants online tools, such as retirement calculators, to keep up-to-date with their savings progress.
ESOPs: Giving Employees a Stake in the Company
An employee stock ownership plan (ESOP) primarily invests in the stock of the employer to fund the company’s retirement plan.
To initiate an ESOP, a company must first create a trust to receive its annual contributions of stock. Individual employee accounts are set up within the trust, and the company’s stock contributions are allocated to the individual accounts based on a formula. For example, the allocations might be done in proportion to compensation or years of service.
Employees only become eligible to receive the assets in their accounts through a vesting process based on years of service. Under a so-called three-year cliff schedule, employees with three or more years are entitled to 100 percent of their contributions. A six-year graded vesting schedule entitles employees to 20 percent of their contributions after two years of service and an additional 20 percent with every additional year of service. Once employees reach six years of service, their shares are 100 percent vested.
When they leave their employer, employees receive the amount vested in their account.
Portland, Oregon-based Streimer Sheet Metal Works Inc. has contributed to its ESOP trust every year since its creation in 1981. Today, employees own 37 percent of the company, while the remaining shares are privately held.
Steven L. Streimer, the company’s president, notes that he makes a concerted effort to demonstrate to employees that by helping the company improve its performance, they benefit via the growth in the value of the stock that they own via the ESOP. Every year, an independent firm puts a valuation on the stock, enabling Streimer to demonstrate the company’s growth and benchmark it against the broader stock market.
“It’s a very lucrative benefit for our employees,” he says of the ESOP. “The people we’re hiring right now are very interested in it.”