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Published: Sunday, 7/30/2006

Small firms forgo pensions

BY HOMER BRICKEY
BLADE SENIOR BUSINESS WRITER
James Eloff plans to fund Kayo Lumber's pension plan sufficiently to cover office manager Judy Nolan, left, and one other employee. 
James Eloff plans to fund Kayo Lumber's pension plan sufficiently to cover office manager Judy Nolan, left, and one other employee.
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When a former part owner of Kayo Lumber Co. retired from the Lambertville firm in 1997, James Eloff, president, realized he had a problem.

"His retirement basically drained our fund," said Mr. Eloff, who now is majority owner of the 45-year-old company.

The company's defined-benefit pension fund had a liability of about $500,000 for remaining participants, requiring the annual contribution to soar from $12,000 to $58,000. The plan, which currently covers himself, the company's office manager, Judy Nolan, and one other employee, is now frozen.

Most of the 110 employees of Hirzel Canning Co. in Northwood are participants in the firm's decades-old defined-benefit pension plan that was frozen last month. "It was just putting too much of a load on us," explained President Stephen Hirzel. "And our new hires are more interested in a 401(k) plan."

Those companies are part of national trend toward retirement programs other than the traditional defined-benefit plans that are supposed to guarantee a pension check, usually based on years of work and age at retirement.

Many thousands of companies, small and large, have adopted tax-advantaged 401(k) salary-deferral plans and cash-balance plans, which create separate retirement-savings accounts for each worker.

There also are tax-favored accounts designed for small business.

Experts say larger companies tend to put a higher percentage of worker pay into retirement programs, but many smaller firms do as well for their employees - although they usually shy away from traditional pensions.

Hundreds of companies nationwide are reducing or eliminating traditional pension plans, including many that were dumped onto the federal Pension Benefit Guaranty Corp., an agency that protects pensions of 44 million workers and retirees in more than 30,000 plans.

The agency reported 120 plans were terminated last year, involving 269,000 workers, and its deficit is now about $23 billion.

There is no evidence, an agency spokesman said, that small-business plans are funded better or worse than big plans.

But many plans are simply frozen, with benefits still available to participants but not growing.

Among firms in the Toledo area with pension plans frozen in recent years are Master Chemical Corp., with more than 80 workers in Perrysburg, and Fremont Co., a food processor in Fremont, with about 100 workers.

It often takes years to wind a plan down. Mr. Hirzel expects his 83-year-old firm to fund the plan for up to 10 more years. The plan covers nearly 200 people.

"We will take care of the people in the plan," he said.

Younger employees, he said, don't trust that traditional pensions are secure, having witnessed airlines and other companies dumping them. Instead, some employees want control of their retirement funds.

"There has been a large shift to 401(k) plans," said Michelle Klement, a principal in the Maumee accounting firm of William Vaughan Co. Out of hundreds of firms she has dealt with, only a handful of small companies have defined-benefit plans.

Hirzel Canning, in Northwood, has frozen its decades-old pension plan. Hirzel Canning, in Northwood, has frozen its decades-old pension plan.
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But the majority of area small businesses offer some sort of retirement programs, she said. Almost 80 percent of area firms and organizations with fewer than 50 workers and almost 90 percent of firms with 51 to 150 workers have 401(k) plans, according to a study done by the Employers Association, a Sylvania group with 650 employer members.

It also found that 11 percent of the smallest firms have fully paid pensions, as do 13 percent of the larger firms.

Nationally, 401(k) plans - begun a quarter of a century ago - also dominate. They are the main retirement vehicle for about 40 percent of small companies, according to a soon-to-be-released survey by the National Federation of Independent Business Research Foundation in Washington.

That study showed that other popular vehicles are SIMPLE plans, or savings incentive match plan for employees, in which the workers' share is in the form of salary reduction; SEP, or simplified employee pension plans, involving deductible IRAs with contributions from both employer and workers; profit-sharing plans; and defined-benefit and other plans.

Traditional pensions are very unusual among small businesses, said William "Denny" Dennis, Jr., senior research fellow for the business federation.

Many area companies that were started in the last two decades opted for 401(k)s.

"It's a great way to save for retirement," said Jeff Kimble, founding partner of Communica, an 18-year-old advertising and marketing firm in downtown Toledo with 22 employees. "There's pretty obviously a tax benefit."

More than 80 percent of the firm's workers are in the plan.

Such plans are funded by the worker, deferring part of salary into a savings account. But in the area, about three-fourths of the small companies kick in a matching amount to a set level of employee contributions; about half of those match up to 3 percent of pay, and half match at a higher level.

Rick Brunner, president of Toledo's Signature Bank, said when the bank opened in early 2002, its founders adopted both a 401(k) plan and a profit-sharing plan.

"The profit-sharing plan is totally discretionary," he said. "We can elect to do it any year or not to do it, but we try to target somewhere around 4 percent of an employee's salary and bonus." The bank has contributed profits in each of the last three years.

Complexity, inflexibility of funding, and government and accounting regulations have hurt defined-benefit plans, said Robert Wender, owner of Wender & Co. in Springfield Township, a retirement-plan consulting firm.

Out of about 200 clients, only five or six still have defined-benefit plans, he said, or about half the number of 15 years ago.

Another problem is that smaller employers typically get nervous about the future funding obligation, said Bob Cabanski, director of administration for Trust Co. of Toledo in Springfield Township.

That's why 401(k) plans are much simpler, because there is no future funding amount; it's all immediate, he said.

At Kayo Lumber, Mr. Eloff has enrolled the rest of his 11 employees in a 401(k) plan, and four are covered by the Teamsters pension, to which he contributes.

His goal is to fund the frozen pension plan enough to pay for his two covered employees' retirements, and then he will scrap his own pension from the plan, he said.

Contact Homer Brickey at: homerbrickey@theblade.com or 419-724-6129.



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