EMPLOYERS OFFER RETIREMENT PLANS AT LOWER COST

Over 90% of large- and medium-size employers offer retirement benefit plans and keep the costs of those plans constant. But in plans that give employees the option of participating, employees may be contributing too little and investing too conservatively for the plan to produce the necessary income to provide for a comfortable retirement. These findings are the result of a study, "Retirement Benefits in the 1990s" conducted by KPMG Peat Marwick LLP's compensation and benefits practice.

The telephone survey of over 1,000 randomly selected employers found that 91% of employers with 200 or more employees offered at least one retirement plan in 1995, slightly more than in 1994 (89%) and significantly more than in 1993 (78%).

Plans Increasing, Costs Level

While the popularity of employer-sponsored retirement plans has increased over the last few years, the costs of offering such benefits have remained essentially the same. Employers' costs for offering retirement plans averaged about 6.5% of payroll in 1995. This is actually a
slight decrease in costs reported in the two previous years (6.75%). The costs reported include expenses but exclude Social Security taxes, which represent 6.45% for all employees earning up to the maximum Social Security wage base of $61,200.

The majority of employers surveyed offer two types of retirement plans. Over half (58%) of the respondents used a 401(k) plan, covering 63% of employees. The second most popular benefit plan is the defined benefit plan, offered by 41% of employers and covering 71% of employees. Profit-sharing plans and ESOPs experienced slight declines over the last three years.

Many Plans Offered, But Few Accepted

While the number of employers offering retirement benefit plans to their employees increases, many employees choose not to participate. More than 35% of employees given the opportunity to participate in plans by contributing their own money opt not to do so. Of those offered the opportunity to participate in a 401(k) plan, 65% actually participated in the plan, up from 61% in 1994. Employees who do take advantage of the employer's plan contribute about five percent of their pay, less than half the contribution limit of most plans. Such a low savings rate may not provide enough income for retirement.

The low savings rate may not be the only problem according to the KPMG report on the survey. When selecting investments for retirement savings, most employees chose to put their money in conservative, low-return investments, further reducing the chances that they will have enough income at retirement. This is a particular problem as over 80% of employers offering retirement plans believe employees will need three sources of income for a comfortable retirement: employer-provided benefits, personal savings, and Social Security. Only 4% of employers felt a retiree could live on the retirement plan alone. The prevailing attitude was that employer-provided benefits should serve as a supplement to retirement income, not the sole source.

"The good news is employer-provided retirement benefits are widespread and employer costs for those benefits are holding steady. The bad news is employees are not maximizing those benefits," said Roy Oliver, KPMG's national partner in charge of the compensation and benefits practice. "Employers need to educate employees about retirement savings and about the need for the employee's own savings, even when the employer is providing a retirement plan."

Employers Are More Likely to Add a Plan than Drop One

Employers have been twice as likely to add a retirement plan than drop one over the last five years. Most of those dropping a plan merged or consolidated the abandoned plan with another or created a replacement.

The survey revealed some other interesting trends:

* Among larger employers, the traditional defined benefit pension plan is constant in terms of both employees covered and employers offering the plans. The number of employers offering the plans has climbed from 68% in 1993 and 70% in 1994 to 71% in 1995;

* Employers offering 401(k) plans felt confident about the attractiveness of their plans. Eighty-seven percent of employers offering such plans felt plan participation would not decline if Congress made IRAs more available and deductible for all workers; and

* Among employers not offering plans, 82% never offered retirement plans, suggesting that the lack of coverage is due to the employers' failure to implement retirement plans, not eliminating them.

Copies of the full report, "Retirement Benefits in the 1990s: 1995 Survey Data," are available for $135 each by faxing Jim Berryman of KPMG's compensation benefits practice [(201) 307-8071]. *

Editors:
Sheldon M. Geller, Esq.
Geller & Wind, Ltd.

Avery E. Neumark, CPA
Rosen Shapss Martin & Company

Contributing Editor:
Steven Pennacchio, CPA
KPMG Peat Marwick LLP

OCTOBER 1995 / THE CPA JOURNAL