Retirement Plans for the Construction Industry

Retirement plans for the construction industry. Offering retirement plans in the construction and contractor industries can be complicated, but it doesn't have to be hard. While the benefits of retirement planning, such as tax breaks and improved employee retention, are clear, many decision-makers don't know where to begin or are unsure if they could be offering something better.

By allowing Correct Capital's fiduciary advisors and retirement consultants to do the heavy lifting for you, you, your employees, and your shareholders can get the most benefit from the investment options you offer. To speak to a financial advisor about your company's needs today, call Correct Capital at 877-930-4015 or contact us online.

For information on your employees’ retirement planning needs, download Correct Capital's 2022 Annual 401(k) Participant Survey here.

Best Retirement Plans for Construction and Contractors

Construction companies and contractors have a variety of retirement plans they can offer:

401(k)s

The bedrock of American retirement planning in the private sector, 401(k)s are as relevant to the construction industry as they are for any other sector. 401(k)s allow employees to dedicate part of their income to their retirement savings and investments, and employers can make matching contributions to offer even more savings. The financial incentive for the employer typically involves substantial tax advantages. Employers can offer 401(k)s with a traditional (before-tax) or Roth deferral, and take advantage of special rules like Safe Harbor 401(k)s for more targeted benefits.

Employee Stock Ownership Plans (ESOPs)

ESOPs can be thought of as retirement plans for employees and succession plans for owners. In an ESOP, ownership shares are granted to employees while control stays with ownership. It functions similarly to a 401(k), but the only investment allowed is the employer stock. Employees can't contribute any of their own money, and ESOPs are 100% company-funded. An owner can sell part or all of their shares to an ESOP, allowing them to get liquidity (either immediately or over a 5-10 year time frame). ESOP shares are often vested over credited service, and often don't include any voting rights, i.e. decision-making shares, allowing current leadership to stay in control. With an ESOP:

• You can stay hands on while getting ready for your own retirement
• An owner can sell as many or as little shares as they want, allowing them to stay invested in the company's growth
• Since an ESOP is a qualified plan you do not pay taxes on the earnings on shares owned by the ESOP
• You can leave the business while allowing other owners/senior leadership to keep their shares

ESOPs allow employees to focus on the performance and long-term growth of the company, and see the results in their retirement savings.

Is an ESOP right for my business?

ESOPs can't make a bad company good, but they can help make a good company great. ESOPs make sense for companies that:

• Are profitable and have 25-30 or more employees
• Have at least $1 million in EBITDA and a business valuation of about $5 million

What fees and costs are associated with ESOPs?

Establishing an ESOP, with legal fees, business valuations, and paying a trustee can add up to anywhere between $150,000 and $250,000 as an implementation or one-time fee. While the annual cost of maintenance is around $30,000 to $50,000.

KSOPs

KSOPs are so-named because they're essentially an ESOP operating within a 401(k), providing the benefits of each. As in a 401(k), employees can contribute to a KSOP through payroll deductions and purchase shares of the company.

One downside of ESOPs and KSOPS is that they don't offer the range of investment options and risk tolerances as 401(k)s, as funds are invested in one asset (the company). By getting creative and offering a wide array of investment plan options, like ESOPs and 401(k)s, companies can get the most benefit from their retirement plans.

Prevailing Wage Plans

Government contracts require contractors to pay construction workers a prevailing wage, as stipulated in the Davis-Beacon Act. Prevailing wages consist of an employee's base hourly rate, plus another per-hour dollar amount called the "fringe." While it's common (and easier) to simply pay out the fringe as additional wages, prevailing wage plans allow employers to set aside that money in a qualified retirement plan for their employees. In addition to attracting and retaining employees, prevailing wage plans help employers by:

• Reducing payroll costs
• Reducing workers' comp premiums
• Allowing you to place more competitive bids through reduced operation costs

Prevailing wages can be used as contributions to fit prevailing wage employees into existing 401(k) plans.

Multiple Employer Plans (MEPs)

An MEP is a retirement plan offered by a Contractor Association where two or more unrelated employers participate in the plan. MEPs pool the contributions and assets of all adopting employers, and are managed and administered by retirement professionals. They can be arranged as a 401(k) where employees contribute, employers match, and an independent financial firm manages the investments. They were designed to allow smaller businesses to offer tax-advantaged retirement plans without needing a ton of resources. Traditionally in the construction industry we see two types of MEPs. They can either be "closed MEPs" or and "association retirement plan."

• Closed MEPs are made up of multiple, unrelated employers that are part of a "bona fide" group or association. "Bona fide" means the employers share a commonality beyond their 401(k), such as being in the same industry or if sharing common affiliation or ownership.
• Association retirement plans are a sort of "soft" closed MEP or "half-open" MEP. Employers in different industries in the same geographic region can join, as can employers in the same industry in different regions, as well as self-employed working owners.

The rules governing each type of MEP vary, but they all allow companies to achieve the same scale and level of service in larger plans while significantly cutting down cost and administrative duties. They're great options if:

• You're a start-up or smaller company looking to offer your first plan
• You want to reduce administrative fees and costs
• You want to outsource many of the responsibilities related to maintaining a retirement plan
• You want professional financial advisors managing investments
• You want to reduce your liability and outsource the majority of your fiduciary duties

Correct Capital: Your Partner in Retirement Planning in the Construction Industry

In the construction and contractor industries, having robust retirement plans is crucial to attract and retain talented professionals. Whether it's offering 401(k)s, participating in an MEP, or adapting your plan to change with the times, the right retirement solution can provide financial security and peace of mind for employees and employers alike. Retirement planning is an ongoing process that requires regular review and adjustments as circumstances change. With Correct Capital's professional financial advisory services you can create a retirement plan that suits your specific requirements and empower your construction professionals to perform their best. Speak to a team member today at 877-930-4015 or contact us online to get started.