Masonry Magazine June 1961 Page. 13
executive Compensation
(Continued from page 5)
to the plan really represents $2 or more out of their present income. The company's cost, on the other hand, is fully deductible. As these executives are the persons you are most anxious to help, this is an inexpensive way to save them considerable extra expense.
"Once you get a pension plan, how can you get out of it if it doesn't work for you?"
This is probably the biggest worry encountered and an understandable one, particularly since pension plans most companies are familiar with have always involved fixed annual deposits. But these plans are merely holdovers from the past. Today it is possible to design a plan so flexible it can be reduced, suspended or even stopped at the end of any year.
If you should decide to give up such a plan, there is no further commitment. Naturally, the money already paid in can not be recovered by the company. It belongs to the participants, and must be paid to them or held at interest to provide a portion of the original pension at their retirement.
"What happens if an employee dies?"
This is a problem because it affects the annual cost. You have three choices: (1) You can give his family the money deposited to his credit- the most expensive choice.
(2) You can give them nothing- in this case, your plan will be discounted in advance for expected mortality. The actuary will decide how many of your employees will die before retirement, and spread their accumulations over those of the remaining group. This will automatically lower your cost-but it can also lower employee enthusiasm for the plan.
(3) You can make the same saving on expected mortality and then use part of it to add a "death benefit" clause which will assure a deceased employee's family a substantial payment or income for a specified period. More and more plans are now using this provision.
"Suppose an employee quits or is fired?"
It makes little difference why he leaves it is a point too often open to question. So just call it "termination." Again, you have three alternatives: (1) Give him nothing. (2) Give him all the money deposited to his credit. (3) Give him a small percentage-say 5% for each full year he has been in the plan.
Obviously, the first two methods are apt to spell danger. Many employees will either fear they can be fired at age 63 or 64 without any pension (and this has happened), or they will leave simply to get their hands on the money. The best choice is to give them some, but not all, of the money, with the amount depending on their years of participation.
"The last pension salesman I saw insisted on an extra payment of $42,000 to cover something he called "past service." This was just too much money for us. Is it absolutely necessary?"
No. "Past service" is a way of covering the back years of your older employees' service. In effect, it backdates your plan 5, 10 or more years at the time it's installed. This is a nice luxury, if you can afford it. But it isn't necessary. If you have a real hardship case-a loyal employee who is practically at retirement age-make your own arrangement with him outside the plan. It will be a lot cheaper.
This doesn't mean you should ignore the loyalty factor. Long-time employees should get some kind of a break over those recently hired. I usually recommend doing this by adding a small percentage-say ¼ of 1% -to the pension benefit for each year of service. This gives the 20-year man a 2½% higher benefit than the 10-year employee.
"Where should we invest our pension fund?"
This is a question best answered after your plan is designed to your satisfaction. Any earlier decision is really putting the cart before the horse. Generally, however, you will have six methods to choose from: (1) Top-grade securities; (2) mutual funds; (3) a corporate trustee; (4) savings banks or building and loan; (5) insurance contract; (6) a combination of two or more of these methods. Once you have your plan, it is much easier to analyze your objectives and make a side-by-side comparison to see which best fits your needs.
"We've checked into four different plans and they're all too expensive for us. What would you advise?"
It sounds as though you're talking about "stock plans." These often have extra frills you really don't need, but which always cost money. Actually, a plan can be designed to fit almost any budget. If you can't afford a 40% plan, take a 30% plan or even a 20% plan, with the hope of increasing it later. Use social security benefits as a base and let the plan make up the difference. Keep eligibility rules as tight as possible so that you cover only the hard core of your people. All these points will keep your costs down and get you started.
Remember every year that you put off a plan your employees get older, and your cost automatically goes up!
If you have any question or problem on which you'd like help, jot it down and send it to me in care of MASONRY or at my office (60 East 42nd St., New York 17, N. Y.). I'll do my best to give you a prompt, impartial answer.
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