Q. Our privately owned 100-employee company is looking
into setting up a profit-sharing plan. We are aware of some
different types of plans, but we'd like to look at what other
companies are doing. I would appreciate any recommendations you can
make as to model plans or experts we can speak with.
Travis Allen
Via the Internet
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A. Donna Hopson is president of Hopson Pension Services Inc.
in Tustin, California, and past president and current education
chair of the National Institute of Pension Administrators:
As you are probably aware, the 401(k) plan has been the most
popular and publicized type of profit-sharing plan for companies of
any size during the past few years. Internal Revenue Code Section
401(k) permits profit-sharing plan participants to defer part of
their before-tax compensation to the plan. Popularity does not
always equal success, however, and 401(k) plans often fail to
perform as desired due to complex nondiscrimination rules designed
to prevent highly compensated employees (HCEs) from obtaining
greater benefits than lower-paid employees. An HCE is defined as
any employee earning more than $80,000 in 1997, and any company
owner. The maximum average percentage of pay that HCEs can defer is
limited to 2 percent more than the average percentage deferred by
lower-paid employees. Since lower-paid employees tend to have less
discretionary income, their average deferral percentage is normally
low, thus restricting what HCEs are able to defer.
Fortunately, there are ways to increase contributions to a
profit-sharing plan. One way is by making matching contributions.
The assurance that a portion of every contribution made by an
employee will be matched by the employer usually results in
increased deferral rates among lower-paid employees. It's
common to see a 25 percent or 50 percent employer match on
deferrals of up to 6 percent or 8 percent of an employee's
pay.
Contributions and allocations are a component of all
profit-sharing plans whether they contain 401(k) benefits or not.
The contributions are company-funded and allocated to each employee
who has met the plan's eligibility requirements.
During the past few years, legislative changes have added
flexibility to the allocation of profit-sharing contributions
through the use of age-weighted and rate group plan
design. Both age-weighted and rate group plans are subject to
complex nondiscrimination tests, which increase administrative and
consulting fees but permit flexibility in the distribution of
benefits.
There are four common methods of allocating a company
profit-sharing contribution:
1. Everyone who is eligible receives the same percentage, based
on compensation.
2. Social Security benefits are factored into the allocation,
providing slightly higher contributions for salaries that exceed
the Social Security wage base.
3. Age-weighted plans allocate the contribution according to the
participants' ages, based on the premise that the older person
has fewer years in which to accumulate retirement funds.
4. Rate group plans specify contributions for specific groups of
employees (by job description), thus permitting varying levels of
benefits.
Independent third-party administrators and consultants can help
you select and set up a profit-sharing plan; look in the Yellow
Pages under "Pension/Profit Sharing" or "Retirement
Plans."
Q. How do I determine market potential in my local
area?
Name withheld
Via the Internet
A. Shannon Dortch is senior editor of American
Demographics magazine in Ithaca, New York, and an authority on
the consumer market. She writes that magazine's monthly
"Tomorrow's Markets" column, which profiles future
growth markets:
First, define the geographical boundaries of your market. Next,
look up population estimates to determine how many people live in
your geographic market. To do the job right, study the population
of your market by age, not just overall. There are several
excellent data sources. Every state has a Census Bureau-affiliated
state data center, usually housed at a major university. Many of
these state data centers produce their own population projections
by age. To find your state data center, contact the Census Bureau
at (301) 457-1305.
Private companies also compute reliable estimates and
projections. (Any population figure other than those from the
decennial census is an estimate or projection since the population
is only counted every 10 years.) One independent source is Woods
& Poole Economics Inc. of Washington, DC, which can be reached
at (800) 786-1915.
Because not every adult in your market buys your type of
product, find out who does or who engages in behavior that makes
them a potential customer. Trade groups and associations often do
consumer research and offer this kind of data at a reasonable cost
to members. There are also private sources, such as Simmons Market
Research Bureau Inc. and Mediamark Research Inc., both in New York
City. Searching newspaper and magazine databases at the local
library may also yield statistics.
Expanding your market can be a challenging proposition. Taking
the steps I've described to determine the market potential
accurately will give you a good foundation and help keep you ahead
of the game.
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