Why Your Retirement Plan Is Still One of the Best Ways to Build Wealth
While there are unlimited approaches to accumulating wealth, your company’s ERISA-qualified retirement plan still provides one of the best ways for you as the owner and your employees to create sustainable wealth, all on a tax-favorable basis.
Let’s examine some of the unique features of this timeless mechanism that shouldn’t be overlooked.
Establishing a qualified retirement plan, either a profit-sharing, 401(k), or, yes, even a pension plan (cash balance), has never been simpler and less costly. Today, most major retirement-plan providers or independent third-party plan administrators can establish, design, and administer your plan for minimal cost. And if total assets in your plan are large enough, i.e., in excess if $5 million, the cost will be picked up or reimbursed by the carrier.
When I ask business owners what their retirement plan is, they unanimously say, “Charlie, you’re sitting in it!” Yes, your business and your ability to turn a profit each year and eventually sell that business and sail off into the sunset will always be your greatest wealth-accumulation vehicle.
But what if the best-laid plans don’t come true? What if continued globalization and commoditization reduce your margins until you have no business to sell? Or if your kids eliminate that option for you by coming into the business? While your business will always be your ‘first economy,’ paying for your current lifestyle, your retirement plan can become your ‘second economy’ for creating wealth on a tax-favorable basis. With a properly designed plan, you can begin to capitalize your company by transferring taxable income or corporate earnings today into to tax-deferred dollars for tomorrow’s future paychecks.
A standard 401(k) plan affords anyone the ability to invest a maximum of $16,500 per year, $22,000 if you are over 50. This is a sizable amount for the average income earner and, invested over a long term, would allow them to create enough wealth to replace their income in retirement. But for the owner of the company (or a professional service corporation), depending on your company demographics, a properly designed combo profit-sharing/cash-balance pension plan will allow you to shift $100,000 to 300,000 a year from your corporate earnings to your retirement-plan economy, all on a tax-favorable basis.
Over a 20-year period, this would create a significant amount of wealth outside of your company and enable you to generate an income for life, in the event that you are unable to sell your business.
Real wealth accumulation should also be protected from unforeseen forces, and I don’t just mean a prolonged bear market. Accumulating wealth inside your qualified plan affords you the asset protection of an offshore island trust without the expense or the travel. Qualified assets are creditor-proof, and in today’s litigious society, that is a valuable attribute for securing and creating real long-term capital creation and wealth.
As Danny Devito taught us in the funny movie Other People’s Money, the best way to accumulate wealth is with someone else’s money. A qualified plan allows you, the business owner, access to tax dollars you would have otherwise given to Uncle Sam each year on your taxable wages or corporate dollars. Inside your qualified plan, you are afforded the luxury of investing and maximizing the government’s money for your future benefit.
This can accomplished with either Uncle Sam’s pre-tax basis dollars or with after-tax Roth contributions. Both offer the power of OPM. Best of all, your employees will enjoy the investing power of Uncle Sam’s money, and your OPM as well, should you provide a company match or profit-share contribution.
The investment options available in today’s high-tech retirement plans are almost limitless, from mutual funds to ETFs, stock-brokerage windows, managed money, etc.
More importantly for you and especially participating employees of your company-sponsored plan, an ERISA-qualified plan offers the highest ‘standard of care’ in the investment world. That is a fiduciary standard of care.
Simply stated, you, as the plan fiduciary-sponsor, must operate the plan and manage its assets for the exclusive benefit of the plan’s participants and their beneficiaries. Achieving this standard is always a slippery slope. However, today’s major retirement platforms offer both limited and full-scope (section 3(21) and 3(38)) investment fiduciaries and managers who can take on these prudent roles and responsibilities for you. (Most businesses today outsource; you can do the same inside your retirement plan.) These providers take on the fiduciary liability and ensure that the quality of investment options for you and your employees is rigorously monitored and managed. Past performance is never guaranteed, but a superior investment lineup can be.
In summary, your company’s retirement plan, properly designed, managed, and administered, is an ideal mechanism for wealth creation. Don’t underestimate this time-tested approach for capitalizing your business and creating greater financial peace of mind for you and your employees.
Charlie Epstein is president of Holyoke-based Epstein Financial; (413) 932-6236.