BusinessWest

Easthampton Savings Bank’s President Reflects on a Generation of Change

A long-time customer of Easthampton Savings Bank recently called with a question about a loan.
“This was someone who did his first mortgage with us in 1972,” bank President William Hogan said. “When he called, he said he had to talk to me, and I remembered him. He asked, ‘why do you need all this information?’
“I said, ‘Jack, the world has changed,’” he continued. “And it’s true — what we used to do with a handshake when we took his first application, we can’t do that anymore. Now, a loan file is four or five inches thick by the time it gets completed. Those are big changes, and changes which aren’t necessarily for the best.”
As Hogan prepares to step down in late 2013 after more than 20 years at the helm, and after more than four decades working at the bank, he can picture the full panorama of changes that have transformed financial services, from customer convenience — forget ATMs and online banking; ESB didn’t even offer checking accounts when he was first hired — to the ever-increasing tangle of regulations and paperwork that so confounded Jack.
Some changes are a source of pride — the bank’s asset growth over the past four decades, for instance. “The bank had $53 million when I joined; we’re just under $1 billion today.”
And, by all financial measures, Easthampton is currently on a roll after posting a strong 2011 and first quarter of this year. Nowhere is that more evident than in Agawam, where the bank opened its ninth branch last April. “That office has taken in $25 million in deposits in its first year,” Hogan said, adding that such performance confirms the demand for an Agawam office, and also justifies what has been a gradual, deliberate strategy for branch expansion.
“It’s a natural progression of growing the bank franchise. From Easthampton, we went to Southampton, then Westfield, then Agawam,” he said, in addition to offices in Belchertown, Hadley, South Hadley, and two in Northampton. “We’re not leapfrogging over too many communities or going into places where we might meet some resistance, where people say, ‘I don’t know Easthampton Savings.’ That has not been an issue for us.”
He said customers in Agawam have responded to the bank’s emphasis on strong personal service. “Our style of community banking is very much employee- and people-focused,” he told BusinessWest, noting that branch officials in ESB’s various towns have become active in senior centers and other organizations. “They’ve really become part of the community. That’s part of our culture, and I like to think it’s become our reputation. We’ve gotten to know the people we serve.
“We’ve wondered how far we can go geographically with the Easthampton name,” he continued, “but as we’ve reached farther geographically, we’ve had no problem with our brand and name recognition. And I think it’s because we’ve done so in a methodical, measured sort of way.”
For this issue, Hogan sat down with BusinessWest to talk about that measured growth, the changes that have transformed his field, and what he’ll miss most when he retires next year.

Turnaround Time
Hogan is justifiably pleased with the shape Easthampton Savings is in as he winds down his tenure at the helm — particularly after a rocky patch not long ago.
“In 2010, we had little or no loan growth. But in 2011, we had terrific growth” — specifically, a $61 million increase in loans, to go along with a $52 million jump in deposits. “And we’re having terrific growth again in 2012, doing the exact same things we did before. I wish I was smart enough to know how that happened.”

Hogan echoes many the region’s community-bank presidents who have been telling BusinessWest for years that they have plenty of money to lend, even as the Great Recession suppressed demand for commercial loans and mortgages.
“From the highs of the market, in 2007 and early 2008, before the financial disaster, until today, we’ve done very little differently with regard to our standards and demands and our loan policy,” Hogan said. “The things we thought we were important to making good lending decisions then are still important today. We didn’t make a single subprime loan. We didn’t reach for loans for people who didn’t have the capital to pay it back; we didn’t make loans with no down payment.
“That was true before, and it’s still true today — and, by and large, that’s true of all the community banks,” he went on. “We didn’t do some of the wild things that got banks into trouble and got a lot of customers in trouble. We’ve had a few foreclosures, because that’s the normal life cycle — people lose jobs, go through life events, and they’re not able to stay in their homes. Most are fortunate enough to sell and get out, but even then we have to take action against some people, only as a last resort.”
He noted that ESB is the number-one mortgage lender in Hampshire County, and ranks in the top 10 in Hampden County — with only two branches located there. “We have seen some refinancing of our own portfolio, but we’ve also done refis where people had a mortgage at another institution. Again, it’s because of the way we treat people, the way we deliver our products. We’ve had people come to us and say, ‘I’ve heard good things from people who have done business with you, and I want to be a part of that as well.’”
Commercial lending has been on the rise as well, Hogan said, adding that the bank has added an additional lender recently and will soon open a new loan center close to its Easthampton headquarters, where the IT infrastructure and other services will also be located.
“We have competitive products, both variable and fixed-rate products, first-time homebuyer products,” he continued. “The fees associated with our lending products are lower than — maybe not everybody, but certainly lower than most — and I think that’s one of the appeals of doing business with us on the lending side. We also have some terrific lenders who know the business and have been very successful with business development.”
ESB has seen that kind of successs against the backdrop of a much tougher regulatory environment — again, one that surprises longtime customers like Jack. “All the rules and regulations — that’s another whole subject,” Hogan said. “With legislation like Dodd-Frank, they’re making the business of banking more complex and more expensive for banks, and I’d argue that many of the changes are at the expense of customers.”

New Generation
There’s no doubt, however, that the past 40 years have put some very powerful financial tools in consumers’ hands. Hogan smiled when he thought back to the early 1970s, before the bank even offered checking accounts. In 1973, ESB was finally authorized to issue NOW (negotiable order of withdrawal) accounts.
“Up until then, when somebody came into this bank and wanted to open a checking account, we’d send them next door to the First National Bank of Easthampton — later Baybank — and when someone went there asking for a mortgage, they’d send them here. The banks had mutually exclusive activities.
“I guess there have been so many changes that I’ve become somewhat immune to the pace of change. Change is in the air all the time,” Hogan said, noting that, when he arrived at ESB, “we didn’t have computers. Online banking — what’s that? We didn’t have ATMs, and so many things that people take for granted today. Going to the grocery store, using your debit card, and getting cash back — sometimes it feels like we’re getting ready to replace banks.”
For the past two years, he said, ESB has been actively tracking the number of customer visits to the physical branches and the number of electronic transactions.
“The transactions in the bank are flat and declining,” he said, “but the number of transactions outside the bank, electronically, through a whole variety of means, continue to grow exponentially. Mobile banking is the most recent things — who knows what the next one is going to be?
“A generation is taking advantage of things that didn’t exist not too long ago,” Hogan continued, “and in many ways, it makes it difficult to leverage customer service and style and brand because we don’t have as many opportunities, or touch points, for customer service, to get to know people on a personal basis.”
Even so, Hogan said the bank has long connected with the community in other ways, many of them philanthropic.
“Being able to help and support so many valuable community resources is very rewarding for the bank,” he told BusinessWest. “Whether it’s the Red Cross, the Northampton Survival Center, or the Little League, there are ways we can reach out and support things that make this a better place to live. The bank is proud of that, and that doesn’t happen unless we have profitability. We’re able to do these things because we’ve been profitable for many, many years; we’re able to make contributions to support valuable community activities.”

Open Door
Toward the end of his chat with BusinessWest, Hogan brought out a framed chart given to him on the occasion of his 40th anniversary with the bank. His 17-year (at the time) tenure as president was noted at the end of a list of the bank’s previous 14 presidents, and their years at the head desk, dating back to 1869. The third man on that list, one John Mayer, served a record 20-plus years, from 1880 to 1901. Come next May, Hogan will surpass that mark.
That’s a long time in such a dramatically changing industry, but despite ESB’s exponential growth and the impressive advances in technology, what Hogan values most, even today, is the bank’s personal touch.
“I would argue that’s what gives us a leg up over many of our competitors,” he said. “My door is open; I answer my own phone. When someone needs to see me, I say, ‘let’s make an appointment.’ While I’m not looking for problems for customers, when there are problems, that gives us an opportunity to solve it for them.
“You know, the people aspect of this business is the one I will miss the most — helping people and solving problems, whether those are customers, my employees, or board members,” Hogan continued. “The relationships I’ve formed with all those people are the basis for what I do, and what has made this so enjoyable for me. I’ve never thought of this as a job, from my earliest days until today. It’s been very, very rewarding for me.”

Joseph Bednar can be reached at bednar@businesswest.com

Many Factors Go into Determining the Success of a 401(k) Plan

The future retirement of many Americans depends on the success of their retirement plans. Although some believe that Social Security will be enough to provide a satisfactory standard of living in retirement, the administration’s funds are quickly running dry; Social Security trustees estimate that funds will be completely depleted by 2038.
The 401(k) retirement plan has increasingly become a means to providing an adequate retirement, but plan sponsors (employers) often have trouble determining what qualifies as a successful plan.
What follows are suggestions to ensure successful retirement for both plan participants and sponsors.

Creating Success for Plan Participants
The ultimate measure of the success of a plan is in providing paychecks for life, an adequate amount of money throughout retirement. However, many participants do not have the time, energy, or knowledge to ensure that their retirement years will be their desirement years — the time in which they enjoy everything they desire. Employers can help employees by using what I call the ‘401(k) on autopilot’ system:
• Automatic enrollment: Enrolling in a plan is the first step in creating a successful retirement. However, many employees do not enroll in their companies’ 401(k) plans. Each year, employers can notify employees that, if they do not opt out of the companies’ 401(k) plans, they will be automatically enrolled. More often than not, the employee’s inactivity will work in their favor, and they will begin saving for their future automatically. Not only does increased enrollment help the employees with their future retirement savings, but it provides additional tax benefits for the employer and, in certain instances, helps to boost the employer’s tax-deferred contributions as well.
• Automatic increase: This is another feature that employers can take advantage of in creating successful retirements for employees. It is commonly said that contributing 10% of one’s income will be enough for a successful retirement. However, most participants will start contributing at a level well below 10% (sometimes only 2% or 3%). By automatically increasing contributions by 1% each year until they reach 10%, employees can painlessly move toward the target percentage. By explaining automatic increases to employees, as well as other elementary financial concepts, employers help their participants become more financially savvy in understanding retirement benefits.
• Automatic default into a qualified default investment account (QDIA): Today, most 401(k) plans allow participants to choose their contribution allocations. However, many participants don’t have the time or knowledge to understand which investments will give them the greatest returns at an appropriate risk. Contributions without a predetermined destination default into QDIAs, which provide participants with greater returns on their money at appropriate risk, based on their target years to retirement. As long as plan sponsors conducts due diligence when selecting QDIAs, they receive fiduciary protection through ERISA.
• Automatic open re-enrollment: This auto feature not only keeps participants enrolled in the plan, but it also nudges them into QDIAs. Once a year, plan sponsors can inform their participants that they have 30 days to review their investment choices and that, if they do not make a selection, their contributions will go into QDIAs. This further enhances the fiduciary protection of the plan sponsor and ensures that participants’ contributions will be invested in appropriate funds.
If left to their own devices, most participants would not be able to create paychecks for life; however, employers can help by putting their 401(k) plans on the autopilot system and educating employees about fundamental retirement-plan concepts. For more information on how to use these auto-features for your plan, contact your financial advisor.

Creating Success for Plan Sponsors
Retirement plans don’t just help participants achieve paychecks for life. Employers receive a number of benefits from retirement plans as well, and should measure their plans’ success based on the following metrics.
Tax deductions: Employers are able to deduct the amounts that they match in employee contributions.
Tax deferrals: Success for employers, like success for employees, often comes down to how much money they can save. This money grows even more productively if contributed on a pretax basis. Employers have a number of plans that they can take advantage of, including 401(k), profit sharing, and cash-balance plans. If you are able to contribute up to $250,000 per year to retirement plans but are not doing so, you should consult an advisor. You will not only benefit from more tax deductions, but you will also have tax deferrals, which will allow your money to grow more rapidly than after-tax contributions.
Success in retirement ultimately depends on one thing: providing paychecks for life. As Social Security funds dwindle, employers must look for an alternative way to provide adequate retirement funds for themselves as well as their employees. By taking some of the steps listed above, plan sponsors can ensure adequate funds for participants in addition to receiving fiduciary protection and taking advantage of tax deductions and deferrals for their own retirement savings.

Charlie Epstein, CLU, ChFC, AIF is the president of Holyoke-based Epstein Financial.  He is the author of the book Paychecks for Life, which offers nine principles for participants to turn their 401(k) plans into a secure retirement income. Epstein has frequently been named to 401(k) Wire’s Top 100 Most Influential People in the 401(k) Industry List and Top 300 Most Influential DC Advisor List. He is a member of the Legg Mason Retirement Advisory Council; (413) 932-6236; cdepstein@finsvcs.com

There Have Been Some Changes of Note for HSAs and FSAs

Health savings accounts and flexible spending accounts are growing in popularity. However, many people aren’t aware of the changes that take place in these plans from year to year.
It’s important to discuss account details with an agent each year to be fully aware of the current rules or upcoming changes. What follows is a look at some recent changes with HSAs and FSAs.

Flexible Spending Accounts
These accounts are sometimes called flexible spending arrangements. They are tax-advantaged accounts that let employees automatically deposit a specific amount of each paycheck into them. Once there are funds in the account, they can be used to pay for current or future medical expenses.
These accounts are different from HSAs and HRAs in that they are usually offered with traditional medical plans. They also differ from HSAs in that the unused funds in the account may not be carried over to the next year. Debit cards or forms are used to access funds from the account if money is needed.
Flexible spending accounts allow account holders to contribute to the FSA for any costs that aren’t covered by insurance. Some examples of such expenses include co-insurance, co-pay amounts, and deductibles. If a health insurer won’t cover a treatment or related health expense, FSA funds can be used to pay for it.
The specified limits saw some changes from 2011 to 2012. It was decided that 2012 would be the last year for no limits on FSA contributions. While there may not be limits in place going forward, plans must specify a maximum percentage of compensation to be contributed to the FSA or a maximum dollar amount. The changes from 2010 to 2011 also eliminated over-the-counter medications from coverage if they were not prescribed by a doctor.
The year 2013 will likely see one of the biggest changes: FSA contribution limits of $2,500 annually with yearly inflation increases.

Health Savings Accounts
HSAs are medical savings accounts that also have tax advantages. Taxpayers who are enrolled in HSA-qualified health plans with high deductibles are able to obtain them. At the time of deposit, the funds contributed to these accounts are not subject to federal income tax. Any unused funds that remain in the account at the end of the year are carried over to the next year and added to further contribution amounts.
Since contributions also change with these plans each year, it’s important to be aware of the changes. The adjustments from 2011 to 2012 include an increase in out-of-pocket, high-deductible health plan (HDHP) maximums and HSA contribution limits. However, there are no changes with the HDHP-required minimum deductibles. HSA contribution limits are as follows:
• Family: $6,250;
• Individual: $3,100;
• Catchup contributions: $1,000
The individual amount of $3,100 reflects an increase of $50 from 2011’s limit. The $6,250 limit for families is an increase of $100 from 2011. Catchup contribution limits, which are for people over the age of 55, remain the same between 2011 and 2012.
HDHP minimum required deductibles are:
• Self: $1,200;
• Family: $2,400;
• HDHP out-of-pocket maximum — family: $12,100
• HDHP out-of-pocket maximum — self: $6,050
The HDHP limit increased by $100 between 2011 and 2012 for singles and by $200 for families.
Another change between 2011 and 2012 is eligibility of over-the-counter medicines. Insulin is the only OTC medicine approved for reimbursement in 2012 under a health FSA, HSA, or HRA without a prescription. In addition to this, it was decided that the penalty of 10% for ineligible expenses paid for using HSA funds would increase to 20% in 2012.

R. Kirk Mackey is an employee benefits consultant with the Dowd Insurance Agencies in Holyoke; (413) 538-7444.

Keys to Understanding and Negotiating Bank Covenants

Most commercial-loan agreements contain what are commonly referred to as financial covenants. These covenants often serve as an early-warning system to alert both the lender and the borrower that the business might not be headed in a positive direction.
Knowledge of how these covenants are constructed and why they might be included is very important in negotiating an effective loan agreement.
Covenants typically break down into three classifications: affirmative or positive, restrictive or negative, and financial. What follows is a review of these covenants and some of the language attached to them, as well as some answers to many of the common questions that business owners and managers have about these terms and conditions.
Affirmative or positive covenants are standards and requirements the borrower must meet while the business loan is outstanding. Examples include maintaining the proper level of insurance coverage, paying taxes in a timely manner, maintaining a checking account with the lender, submitting financial information to the lender, or maintaining the business.
Restrictive or negative covenants are requirements that limit the borrower’s actions in favor of the lender. Examples include limiting capital-acquisition purchases, restricting dividends or stockholder distributions, limiting owner compensation, or preventing new borrowings from other lenders.
Financial covenants are usually derived from common ratios and other metrics based on the balance sheet, income statement, and statement of cash flows, and require the borrower to maintain certain liquidity or performance ratios. Some of the most common are:
• Debt-to-equity ratio: This ratio, sometimes called a leverage ratio, is a benchmark of a business’ total liabilities divided by its total stockholders’ equity. This ratio highlights how much the owners have at risk (equity) vs. the lenders (liabilities). A ratio of 1.5:1 indicates that, for every dollar of equity in a company, there also exists $1.50 of debt.
• Debt-service ratio: This ratio is a cash-flow measure that reflects the borrower’s ability to service its debt obligations. It is usually calculated as a company’s net cash flow divided by its required debt service during a given period. A calculation of 1.2x indicates that, for every $1 of debt service (principal plus interest) a company is responsible for in a given period, it has $1.20 in net cash to service it. This is often a good measure of a borrower’s cash flexibility in meeting debt obligations.
• Working-capital ratio: This ratio is defined as those funds invested in a company’s cash, accounts receivable, inventory, and other current assets, and is calculated by subtracting current liabilities from current assets. Working capital finances a company’s cash-conversion cycle, which is the time required to convert raw materials into finished goods, finished goods into sales, and accounts receivable into cash. A positive working-capital covenant ensures that the borrower exercises prudent balance-sheet management and maintains adequate flexibility to meet interim cash needs.

Can You Negotiate Covenants with
Your Lender?
If your company is strong financially, you are in a better position to negotiate loan covenants with your lender when you are applying for a new loan. Lenders utilize covenants to minimize their risk and protect their interests; however, a lender would not be making a loan to your business if it did not want your business to succeed.  Have a clear idea of where your strengths lie, and negotiate your covenants accordingly.
By submitting a well-developed business plan and having an honest discussion with them about your business, you might be surprised by how willing a lender will be to work with you.

Know What You Are Signing
Ignorance is not bliss when signing a loan agreement, so make sure you carefully read your loan document and understand what you are agreeing to. If you do not understand a covenant or how it is calculated, you should seek out professional guidance, as once you sign that document, you are bound by the terms and conditions of the loan agreement regardless of your understanding.

Monitor and Communicate
Do not wait until the end of the year to look at your covenants. Create a proactive system to monitor progress on all financial loan covenants. Covenants should be reviewed at least quarterly. Update your internal projections through the end of the year and calculate whether you will be in compliance.
If you determine that a covenant breach is apparent, you should contact your lender as soon as possible. Be open and forthright with your lender, as they do not like surprises. Set a meeting; bring your calculations, projections for the remainder of the year, and a realistic recovery plan for the future. The lender is now aware of a possible breach that could occur, and the conversation will be calmer than one conducted at the last minute. A well-informed lender may be willing to change the terms of your loan to your benefit.

What If I Do Not Pass?
Once you realize that you will not be in compliance with the covenants, you will need to notify your lender in writing and request a covenant-waiver letter. This letter basically acknowledges the non-compliance, and the bank then waives the company’s compliance for the period in question.
A covenant breach is a technical violation of the loan document, and allows the lender to take any action legally available under the terms of the loan agreement. One of the most severe actions is to call the loan and terminate the relationship; though not the most common action, it is a possibility.
More often than not, the lender will charge you a penalty for a covenant breach. These penalties can be an increase in the interest rate paid or a one-time monitory penalty. You can attempt to negotiate the penalty with your lender; however, once the covenant is breached the power shifts to the lender.

In Conclusion
It is very important for business owners to fully understand loan-covenant issues in today’s tight credit environment. Failure to do so can place your organization at significant risk. Maintain a healthy and open communication with your lender.
Remember, they would not be willing to loan you money if they did not want your business to succeed. Be prepared to negotiate with a detailed plan of action, and utilize outside professionals such as independent certified public accountants to ensure that covenants are fair, achievable, and address your company’s needs. Your CPA and your banker can be valuable resources in structuring your loan to be the most advantageous to all parties.

Kristi Reale, CPA, CVA is a senior manager with Meyers Brothers Kalicka, P.C. in Holyoke. In addition to the tax, accounting, and consulting services she provides clients, she is also a certified valuation analyst; (413) 536-8510.

The 401(k) Coach Gets Write to It

Charlie Epstein says that, as he was pondering a title for his recently released book, he was, for a very short time by his estimation, thinking about something Steven Covey-like — “maybe ‘Nine Habits of Highly Successful Savers.’”
But while those habits, or principles, as he calls them, are, indeed, the foundation of the book, and he has a patent pending on them, he opted instead for a phrase he started putting to use several years ago  — ‘paychecks for life’ — because he believes it’s far more forceful, attention-grabbing, and to the point.
And it also helps him in his quest to entertain as well as educate, a quality he maintains is missing from most everything else that has been written on the subject.
“When I was starting in the retirement industry and reading through what was available for educational material … it was absolutely atrocious,” Epstein, president of Epstein Financial Services and the 401(k) Coach, told BusinessWest. “The average person comes into a 401(k) meeting with the expectation that they’ll be asleep in 10 minutes. You have to create a Disney-like experience for people today; you have to entertain them.
“That’s hard to do, but the principles are engaging — and they’re simple,” he went on, while explaining his approach taken with Paychecks for Life: How to Turn Your 401(k) into a Paycheck Manufacturing Company, a detailed look at effective retirement saving — although Epstein doesn’t use the word retirement any more.
Well, he does, but only in an exercise he’s probably repeated several hundred times, in which he asks the person he’s sitting across from (be it a reporter, client, or potential client) to give Webster’s definition of the term. Usually he doesn’t wait long before giving the answer himself — ‘to be put out of use’ — and then asking, “do you know anyone who’s working to be out of use?”
So he’s created the phrases ‘desirement,’ ‘desirement plan,’ ‘desirement mortgage,’ ‘desirement years,’ and others, which are at the heart of his motivation to pen and then self-publish Paychecks for Life.
“My book is not about how to invest your money better,” he explained. “It’s about the nine principles to get you to save smarter, and then how to maximize this mechanism that the government calls the 401(k).”
Elaborating, Epstein said he wrote the book ($22.99 hardcover, available through Amazon and paychecksforlife.com) to change people’s attitudes about saving for the years after they’re done working. When asked what needs to be changed, he said many things, but especially the still-wildly held opinion that Social Security or a company pension will be there and be an adequate source of income, and also the sentiment among many people that they simply cannot afford to save for retirement — or save enough to create what Epstein calls a paycheck-manufacturing company.
Which brings Epstein to one of those nine principles, the ‘desirement mortgage’ (which he calls the centerpiece of the book), and the many parallels he makes between this and a traditional mortgage.
Indeed, Epstein advises individuals to follow what he terms the “home-ownership formula for success” when they craft a retirement-savings strategy, with the following thought processes:
• You identified your dream house and what it would cost;
• You committed to paying for your dream house within a certain period of time;
• You calculated what it would cost, i.e. what you could afford to finance each month as a mortgage payment;
• You saved for your down payment;
• You adjusted your plan and budget to overcome unforeseen financial obstacles that might prevent you from achieving your dream of home ownership;
• You never stopped believing you could save for and finace your goal of home ownership; and
• You achieved your dream (desirement) and purchased your first home.
For this issue, BusinessWest turns some of the pages in Epstein’s book, in a figurative sense, while talking with the author to gain some perspective about how he came to write Paychecks for Life, and why he firmly believes it will successfully change some mindsets.

Past Is Prologue
“Your Annual Eviction Notices.”
That’s the title Epstein put on one of the earlier, introductory chapters of his book, and it’s a phrase designed to grab some attention, but also to drive home his points about Social Security and company pensions.
He notes that, when most people get their annual Social Security statements in the mail, they immediately turn to the page that breaks down what they’ll receiving in benefits if they retire at 62, 65, and 67, respectively. What just about everyone neglects to do, Epstein goes on, is look at the first page, where the following notice is printed:
“Social Security is a compact between generations. Since 1935, America has kept the promise of security for its workers and their families. Now, however, the Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement. In 2015, we will begin paying more in benefits than we collect in taxes. Without changes, by 2037 the Social Security Trust Fund will be able to pay only about 76 cents for each dollar of scheduled benefits.”
While discussing this fine print, as he called it, Epstein digressed to talk about why he and many others believe the Social Security system must be changed — with wealthy Americans removed from it, among other adjustments — but quickly returned to the matter at hand, which was getting readers to think well beyond checks issued by the U.S. Treasury when they consider their desirement years.
And the same goes for pension plans, he writes. “In 2007, of all the Fortune 500 pension plans that existed in 1996, 25% had been terminated, closed, or frozen. Between 1996 and 2007, Fortune 500 plans were closed or frozen at the average rate of 3% per year. In 2006, Verizon and IBM shocked the corporate world by freezing their pension plans (managers only in the case of Verizon), which created a standard that others soon followed.”
Which brings Epstein back to the 401(k) — the vehicle that enables employees to put a portion of their current income (a contribution) into several investments on a pre-tax basis — which has been the victim of some negative PR in recent years. Examples include the term ‘201(k),’ used often during the height of the Great Recession, when participants were seeing their balances take hits of 30% or more, and also a Time magazine cover which came out in October 2009 with the headline, “Why It’s Time to Retire the 401(k) (and What You Can Do Instead).”
“That was the worst journalism I think I’ve ever seen in my life,” he said of the Time article, adding that such bad press helped inspire Paychecks for Life. But the seed had actually been planted well before, when the idea of the 401(k) as a paycheck-manufacturing plant started gelling in his imagination.
But merely having such a plan isn’t enough to meet that mission of providing paychecks for life, Epstein told BusinessWest, noting that this simple fact is what compelled him to draft his nine principles for carrying out that task — and then writing about them. They are, in order:
• Act like an entrepreneur;
• Determine your desirement mortgage;
• Use other people’s money to capitalize your business;
• Harness the power of compound interest;
• Use technology to save automatically;
• Manage risk by outsourcing;
• Control fees and expenses;
• Guarantee your paychecks for life with annuities; and
• Take advantage of tax benefits with a Roth.
All the principles are important, said Epstein, noting that, together, they send a clear message — that, for a 401(k) to work as designed, the participant must take full ownership of it. His book, in essence, explains how to do that.

The Plot Thickens
It all starts, literally and figuratively, with that part about thinking like an entrepreneur, writes Epstein, who adds to the generally used definitions of that term his own spin: “one who figures out what products and services are needed and then finds the people (talent) who can make the idea become reality, all the while spending less money than will be received. In other words, one who recognizes opportunities and seizes them.”
Elaborating, Epstein notes that, when he asks many business owners to identify their retirement plan, they almost always answer, ‘you’re sitting in it.’ The bottom line is that entrepreneurs work hard to create value in their business so they can later transform it into paychecks for life. Employees need to do the same thing, he writes, through a 401(k).
“Your employer is saying, in essence, ‘I’m going to give you an opportunity to build a business inside my business that you can sell someday,’” he explained. “The government calls it the 401(k); I call it your own personal paycheck-manufacturing company, the single greatest mechanism you have to accumulate wealth in the most tax-advantaged way — but you have to act like an entrepreneur.”
There are similar calls to action, supporting charts and graphs, acronyms (such as YEM, your employer’s money; and USM, Uncle Sam’s money), and what Epstein calls ‘paychecks-for-life action steps’ for each of the principles. Consider these as typical:
• “The dollars you invest in your PCM Co. are like the employees your boss hires to work in his or her company, only better. Your employees work 24/7/365 and never complain. Hire as many as you can as fast as you can.”
• “To act like an entrepreneur, you must practice marginal thinking. Always think and act in small increments. The results will be exponential.”
• “Uncle Sam’s money (USM) is offered to you interest-free. You can either take it now and invest in your PCM Co. or let Uncle Sam keep it, never to be seen again.”
• “Think of your desirement mortgage the same way you do your home mortgage. Use the lowest interest rate possible and sleep at night. Treat it with respect. Never gamble with it.”
• “Slow and steady wins the race. Compounding takes a while to get started, but once it does, the process accelerates, and your savings grow more substantially every year.”
Epstein also uses a number of catchphrases and mantras he hopes will become part of the reader’s vocabulary, such as the ‘10-1-NOW’ rule.
The ‘10’ stands for 10% of the participant’s pay — the number Epstein and other experts say is needed to generate those paychecks for life. As for the ‘1,’ if you can’t save 10% now, increase the contribution by 1% of your earnings until you get to 10%.
“If you can get a participant to increase their contribution by just 1% to 2% a year, the impact is hundreds of thousands of dollars,” he said, making use of the chart that appears on page 36 to drive home his point.
Overall, Epstein said he tried to make the book entertaining — and he believes he’s done that — “but you can’t get away from the numbers — although I made the numbers simple.”
As for his own numbers, Epstein said the initial printing of the book was for 5,000 copies, which are selling well thus far. There are two main audiences, he continued, listing the “advisor world” and individuals, with the former being the primary target at present.
More than 1,000 copies have been sold to date, with Legg Mason putting in an order for 500, he told BusinessWest, adding that Epstein Financial and the 401(k) Coach is in the process of packaging the nine principles so that advisers can effectively purchase material to teach them to clients and potential clients.
“There will be a video for each principle, and instructions on how to teach them,” he explained, “because advisors need to know how to teach these principles and educate and entertain people.”
As he talked about Paychecks for Life, Epstein — recently named one of the Top 100 Most Influential People by 401(k) Wire — repeatedly referred to it as his first book, with the clear implication that there would be more.
He gave no specifics on potential subject matter for future works, but hinted strongly that they will be similar in their intent to inform, educate, and help people enjoy a long, comfortable desirement.
And they will undoubtedly entertain as well, as Epstein strives to not only keep people awake through an intense discussion of effective 401(k) management, but firmly focused on his now-copyrighted and registered phrase ‘desirement planning.’

George O’Brien can be reached at obrien@businesswest.com

PeoplesBank Surpassed $1 Million in Charitable Giving in 2011

Tom Senecal says the spate of weather disasters and resulting multi-level recovery efforts probably had something to do with PeoplesBank passing the $1 million mark in charitable contributions in 2011.
After all, the bank committed $200,000 for relief efforts in the wake of the June 1 tornadoes that devastated neighborhoods in Springfield, West Springfield, Westfield, Monson, and other communities.
But Senecal, the bank’s chief financial officer, believes the Holyoke-based institution probably would have reached that milestone even if the region hadn’t been visited by those twisters, which created needs that probably couldn’t have been imagined on May 31.
That’s because the needle had been moving steadily toward that number for the past several years — donations totaled $850,000 in 2010 and $705,000 in 2009 — and also because the bank had a very solid year with regard to the bottom line, and sought to redirect profits back to the community as a reflection of the culture at the 127-year-old bank — and to address growing needs in many areas, said Senecal.
“We were seeing a tremendous need in all the communities we do business in,” he told BusinessWest. “Some of it was related to the tornadoes, but it was across the board, really, from gifts to several senior centers to donations to hospital capital campaigns.
“We’re a mutual institution, and we do not have stockholders,” he said. “We believe, as a result of that, that it’s our responsibility to give back to the communities we do business in.”
And while surpassing the $1 million mark is a noteworthy achievement, like the bank’s consistently high ranking on the Boston Business Journal’s listing of the most charitable companies in the state (38th in the last survey), what’s behind that number — meaning the direction this philanthropy takes — is the more significant story, he told BusinessWest.
Indeed, the bank continues to focus its efforts on three major areas — health care, education, and what he called “environmentally friendly initiatives,” with that latest category being a far-more-recent phenomenon, meaning the past decade or so. The weather calamities, especially the tornado, created new types of need, Senecal noted, and new and different ways for PeoplesBank to lend its support to the community.
Examples range from a $25,000 donation to early-childhood-education provider Square One, which saw its downtown Springfield facilities, including its operations center and some programs for children, leveled by the tornado that plowed through the south end of the city, to gifts to several impacted communities for reforestation efforts.
“We made that donation to Square One within the first week after the tornado struck to help with emergency needs that they had within the community,” he said, adding that contributions were also made to a number of organizations involved in relief efforts, such as the Red Cross, the Community Foundation, and others.
But, as Senecal said, there was more to the bank’s surge past the $1 million mark than the wrath of Mother Nature.
Indeed, 2011 was a year when state and especially federal budget cuts hit a number of nonprofit agencies quite hard, said Senecal, adding that PeoplesBank stepped forward to help many of these institutions.
“Government cutbacks have forced nonprofits to seek alternative sources of funding so they can continue their missions,” he said, adding that more reductions are likely in the years ahead, meaning that need will continue to increase.
There was also the bank’s ongoing expansion, he said, noting that, when the institution widens its reach into a different community or neighborhood, it punctuates its presence with donations targeted for that area. This trend was continued recently in Springfield and West Springfield (the bank opened its latest branch there last year), and it will be witnessed in Northampton when it opens its first full-service branch there (and 19th overall) later this year.
“We reach out to the community to find causes that can have as much impact as possible in the cities and towns in which we do business,” he said of this pattern, adding that the ongoing expansion efforts are a big reason why overall donations within the Western Mass. region have increased more than 40% since 2008.
Looking back on 2011 and reaching the $1 million milestone, he noted that that there were donations made to roughly 400 organizations. Many were tornado-related in some way, he continued, noting that a total of $80,000 was donated to five communities for so-called “re-greening efforts.”
Overall, though, contributions were focused on those three main areas of concentration, said Senecal, noting that, in health care, donations were made to senior centers, hospitals, other care providers, and specific initiatives to improve the overall health and well-being of area communities.
There were many contributions in the broad realms of education and the environment as well, he went on, adding that some managed to overlap.
Such was the case with a donation put toward the building of a greenhouse at the Leverett Elementary School in Leverett, Mass.
But Senecal stressed that donations to the community are not limited to checks from the bank, or monetary contributions.
Indeed, PeoplesBank employees were ranked third in the state by the Boston Business Journal in terms of charitable giving from their pockets, and fourth when it comes to volunteer hours donated within the community, statistics that are a big part of the bank’s philanthropic track record.
“When you talk about a corporate culture of giving, it’s not just at the president’s level or the PeoplesBank level,” he explained. “It comes from all the employees.”

— George O’Brien