Thursday, March 20, 2014

How Much for Your Retirement?

By William Fanning

While many architects and engineers indicate they want to keep working “forever” and they plan to pursue projects that enable them to keep working past a normal end-of-career age, there are individuals who plan to retire.

Design firms, with a few exceptions, have tended to focus on current compensation rather than investing in retirement plans.

Over time, the 401(k) has become the overwhelming favorite type of plan among design firms.  There are some ESOPs and some Profit Sharing (only) plans, but the “traditional” fixed pension is definitely a thing of the past today.

The 401(k) is, of course, primarily for workers to direct a portion of their wages into a retirement account, which makes this part of the plan a zero-cost item for the firm.  Firms incur expenses when they match all or a portion of employee contributions, or they make a contribution to the profit sharing part of the plan of some percentage of employee salaries.

Our PSMJ Financial Performance Survey over the years has found that firms have averaged spending between 3% and 4% of salaries as retirement plan contributions.

How does that compare with other types of firms?  A recent Business Week article defined how several companies determine contributions to employee retirement plans.  The results ranged from a high of 15% of salary with several more in the 9% to 12% range among large manufacturing companies to lows in typically low compensation industries (grocery, restaurant) of 1.5% to 7% of salaries.

Obviously, these are only a small fraction of companies, and thus the examples may or may not be representative of all companies.  There also are no government employers where the traditionally defined benefit plans still predominate.  However, we have seen limited government data that indicates retirement cost of 18% of wages, or higher.   For those states and cities with large pension obligations, primarily due to lack of funding in past years, the government payment can exceed 50% of current salaries.

Clearly, the A/E community average is nearer the low end of contributions.  Of course other employers typically do not have wages as 70% of their total costs of doing business.  Thus they can pay a higher percentage of their labor costs into retirement plans without the cost representing a very high portion of total costs.

It appears from the contribution level that A/Es have a fairly high reliance on Social Security to provide income for retirees as the amount contributed by companies is not sufficient to provide adequate income in retirement.  Maybe it is good that so many of our professionals expect to keep working well past the “normal” retirement age.

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