“Compound interest is the 8th wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” Albert Einstein
401k plans are one of the best employee benefits going. If you don’t offer one for your employees, now is the time to get one going.
Encouraging your employees to save now by setting up a 401k plan will set them up for a financially secure retirement later. Do your part, learn about how 401ks work and get one started in your brewery.
In this series of articles we’ll take a look at 401k basics – how they work, how to set one up, and the costs to get started. The 8th wonder of the world is within reach for you and your brewery brothers and sisters.
- The 401k Plan: Why you must have one
- How it Works: Plans, Details, and Administrators
- The Power of compound interest
- To Match or Not to Match
The 401k Plan: Why you must have one
A 401k is a retirement savings plan setup by an employer (that’s you). The plan allows employees to invest part of their pay before taxes are deducted. Further, the earnings grow tax free until the employee hits retirement age.
The combination of putting pre-tax money away, and allowing it to grow tax free is almost too good to be true.
Compound interest as an idea is the 8th wonder, but 401k plans and their tax preferred status make this idea a reality for your people.
How it Works
Once you get past the awesomeness of pre-tax contributions and tax free compounding of returns, you have to deal with all the players involved with setting up a 401k.
At a baseball game, you can’t tell the players without a program. In a 401k plan you’ll need a program to identify all the players you’ll need to work with:
- Plan Sponsor
- That’s you
- Third party administrator (TPA)
- The TPA is a company hired by the plan sponsor (you) to run the day to day transactions of the 401k plan. They handle the nuts and bolts.
- Recordkeeper
- The 401k recordkeeper tracks assets in the plan. Their main job is to track how much $ you have, where it is, and what it’s invested in. They do the accounting of the plan.
- Investment advisor
- In my experience, these are the guys that put all the pieces together. They help you find the TPA and Recordkeeper, develop the Plan Document and are instrumental in Plan Design.
Here’s the bottom line. Find a competent, trustworthy investment advisor and they will do the rest.
401k’s are a great benefit, but they come with great responsibility. There are fiduciary responsibilities, tax filings and all sorts of rules you need to follow. Start with a good investment advisor and follow their lead.
The Power of Compound Interest
Compound interest is earning interest on your interest. To compound is to build one thing upon another. In this case, you build money upon money.
Compound interest works like this: You invest an amount and earn a return (interest). This interest is then added to the initial investment (principal). The power of compound interest arises when you earn a return on the interest + principal. The money is literally making new money.
No doubt you’ve heard these examples before, but they are worth repeating:
If you were to invest $200 per month starting at age 25, and assuming an 8% return rate, you would have $700,000 by age 65. By the power of compounding, less than $100,000 invested turns into more than $700,000 in wealth.
If you were to invest $500 per month starting at age 25, and assuming the same 8% return rate, you would have $1,750,000 by age 65.
The problem is, unless you give them a good reason to invest now, few people will have the discipline to put away the money today for the benefit of the wealth later. The 401k match provides a good reason.
To Match or Not to Match
The 401k employer match is the best return on investment your employees will see in their entire life. Unless, of course, they find the next Apple, Facebook, or Google.
There are many ways to set up the employer match, but a typical arrangement might look like this:
The employer will match, dollar for dollar, any employee contributions to the 401k plan up to 5% of compensation. If the employee contributes 3% and the employer puts in 3% as well. For an employee who makes $40k per year, this means both the employee and employer contribute about $100 per month to the plan.
For the employee, this works out to an immediate 100% return on their investment. A pretty good start to their investing career.
Over time, the combination of employee contribution, employer match and compounding interest may add up to $700,000 or more (see the example above).
If your employees like money, the 401k is the equivalent of a no-brainer. They say there are no ‘free lunches’ in this life, but the employer 401k has the power to provide a lifetime of free lunches (and dinners, and snacks, and happy hours…)
Wrap Up + Action Items
If you don’t have a 401k in place right now, get one going. It’s the right thing to do for your brewery, for you and for your employees.
Find an investment advisor you can trust. Ask around, do some research and find a partner to help you build a solid plan.
Determine if your business can afford a 401k match. There’s no better return on investment for your employees.
Uncle Sam favors the 401k. Allowing employees to contribute pre-tax dollars to the plan, and have those dollars compound upon each other tax-free is one of the most amazing inventions of all time.
Albert Einstein was right – compound interest is the 8th wonder of the world. Don’t sit idle any longer – get a 401k in place for your brewery today. Your employees will thank you (eventually!).
