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# 2030 - THE IMPORTANCE OF 401(K) PROGRAMS

The 401(k) salary reduction plan has probably received more media coverage than any other type of employee benefit plan. There is nothing magical about a 401(k) plan; however, it does have some very attractive features that could benefit you and your employees. Presently, these plans are the best savings vehicle available to our nation's work force for accumulating assets toward retirement on a tax-deferred basis. Consequently, there is consistent pressure on employers of all sizes to implement these plans to compliment their benefit programs.

In a nutshell, a 401(k) is a form of a profit sharing plan that allows a participant to choose how much of his income he wishes to defer into a tax-exempt trust. In your Association's sponsored plan, there is a matching contribution that the employer adds in order to create an incentive for one's employees to participate in the plan. Achieving high levels of participation is very important because of the discrimination tests that the government requires annually. These tests examine the percentage of the total pay that is saved by the highly compensated employees relative to that of the other employees in the dealership. Fortunately, high participation levels are relatively easy to accomplish with forthright communication and employer matching contributions.

The first step that you as an employer must take is to determine whether a 401(k) will fit into your overall employee benefit package. Once a commitment to the 401(k) is made, it is then necessary to formulate the design of your plan. The levels of contribution by the employee, the projected investment options that are available, and the level of matching contributions by you as the employer are all examples of the plan parameters that will be evaluated. The funds in the plan may be invested in a variety of investment accounts. Earnings on the funds in your 401(k) plan compound and appreciate on a tax deferred basis until distribution. Again, your experts at the Equipment Dealers Financial Group will work with you and your employees to help them evaluate their goals and objectives in order to design an investment strategy that is in conjunction with each individual's goals and risk tolerance.

401(k) plans are very popular with employees. I suspect that you may have been asked by your employees on one of several occasions, "Do you have a 401(k) plan?" or, "Are you planning on implementing one?" The 401(k) has indeed become the capital accumulation benefit of choice for the majority of our nation's workers. It is clear that employers who do not have such a plan, will find themselves at a disadvantage when competing for quality employees.

I am sure that many of you remember the tax reform act of 1986 and the impact that it had on defined benefit plans as well as limited partnerships. This act, however, did not at all diminish the interest in 401(k) plans. To the contrary, interest in 401(k) plans has increased considerably in the last 10 years because they offer greater advantages than the current individual retirement account.

• To attract and retain quality, qualified employees.
• Provide an income tax deduction for the corporation.
• Reduce the pressure to improve other employee benefit plans.
• Encourage high levels of participation at all level in your dealership, and give yourself the same benefit as all of your employees.
• Save your dealership money by letting the employees share in the cost of the corporation's retirement plan.
• Can be utilized in a profit sharing context to increase the employee commitment and productivity on the job.
• An employer may add a 401(k) savings feature to an existing profit sharing plan to the extent they have one.

From an Employee's Viewpoint the Advantages of a 401(k) Plan Are Also Considerable. They Are as Follows:

• Provide a simple way to contribute towards one's own retirement.
• Provide immediate tax savings which offers additional tax savings opportunities when money is withdrawn from the plan.
• Provide a much greater investment return than most other individual savings programs. To the extent the employer is matching 10%, that is guaranteed 10% return to the employee plus what other investment earnings there are on the account. Your employees will not be able to do this well any where else in the investment marketplace. Furthermore, you want your plan to be structured this way in order to attract more employees to participate in the plan.
• Offer more liberal withdrawal provisions than most other tax-deferred saving vehicles.
• Provide the opportunity for your employees to accumulate significant amounts of capital toward retirement and other goals in a relatively painless way. For example, the following chart demonstrates the potential account growth for an individual earning $20,000 per year, saving 10% of his pay with a matching employer contribution of $.25 on each dollar saved from the first six percent of his pay and an 8% annual rate of return on investment.

In designing a 401(k) plan for your dealership and your employees, your expert will work with you in the following areas to create the best possible plan given your goals and objectives. We will evaluate and review the following in the design of your plan.

• Contribution resources.
• Eligibility requirements for plan participants.
• Employee contributions.
• Employer matching contributions.
• Vesting schedules.
• Investment options.
• Other plan features which include hardship withdrawals, and loan provisions, etc.

In summary, whether your dealership is large or small, the addition of a 401(k) plan to your employee benefit program can provide considerable benefits _both to your employees, your dealership, and to you, as the employer. The key to success is designing a plan that meets both the objectives of your dealership as well as your employee's.

—March 1995, Oxford Financial Services