Way back in 1978, we started our 401(k) program.  Back then, no one knew what that vehicle  was.  But, the Revenue Act of 1978 let us set up the ASTRE Profit Sharing and Pension Plan.

Our goal- to be honest- was to hook our employees, to give them a benefit that would make them want to stay with us forever. The plan’s set up was expensive; we spent $ 1000 back then.  But, it let our staff put away about 3% of their income in a tax-free fashion.  (Actually, the contributions were subject to social security and Medicare taxes, but absolved from state and federal taxes [until withdrawn])  We kind of matched their set-asides; we provided a 1% match to their 3%.

But, that “chintzy” amount was set because we already were putting 25% of our net profits into the plan.  This portion of the plan had no stipulated limits, no maximum amount that employees (and employers) were allowed to set aside.

Employees had to be more than ½ time (1000 hours a year) {we only had 1 such employee, who was already 65] and had to be in our employ for at least 12 months before they could participate in the 401(k) [pension] portion.  The profit sharing and match portions of the plan had a graduated vesting; it grew from 10% at year 2 to 100% by year 5.  Oh- if the employee decided to not participate in the 401(k) portion, they got none of the profit sharing.  (That was our “incentivizing” program to have our employee participation at the highest levels.  Our employee participation ranged from 75 to 95+% over the years.)

And, while we were among the first to adopt such a program, it wasn’t but 3 or 4 years before many firms switched to this concept.  But, most of the other firms did so at the expense of their previously funded conventional pension plans.  So much so that in 1979, about 1 in 3 employees (38%)  had a company pension plan- but now only 13% have pension programs.

I should also mention that, because we were a private firm, none of the 401(k)  funds were invested in our own stock.  Initially, we chose blue chips (Exxon, IBM, CocaCola, Johnson & Johnson, etc.)- our larger clients.  By the time of my divorce, most of our employee portions were in mutual funds.  (The profit sharing portion stayed invested in stocks.)

The concept is to put away enough funds so that employees can accumulate something between 8 and 10 X one’s annual salary.  But, in reality, most employees (not at our company)  barely have ½ to 1/3  of their salary put away.  Which means they are going to be hurting once they retire.  [My problem is that, while I put away the right amount, I had drained my retirement account to fund my divorce proceedings.]  And, some 30 million small firms don’t offer any retirement program for their staff.

But, at least for ASTRE, the idea worked.  We rarely lost an employee,  But, that doesn’t mean we didn’t have problems with our 401(k).    Black Monday, the 19^th of October in 1987, when the stock market crashed (big time), a good portion of the capital in our plan disappeared.  Not only was there no warning, this came right after the Jewish Holidays, so we had been closed for a while.  That certainly put the fear of God into a lot of our employees.  And, when we reformulated the company in 2001, we found we had to terminate the program.

(The Department of Labor’s position was by closing our company and starting a new one- unless we purchased the assets of the prior company- we couldn’t use the profit sharing/pension plan.   And, we didn’t feel like dropping $ 5000 to start a new program.   I also seem to recall that there was a problem because our new firm was a pass-through entity; our old firm was a conventional corporation.)

By the way, companies are allowed to put away 25% of an employee’s salary via profit sharing.  And, employees can stash up to 100% of their salary (not in our firm’s case), as long as that amount doesn’t exceed $ 18,000.   You can see why a fully-funded 401(k) plan is attractive to employees.

Plus, employees are allowed to borrow against their 401(k) – if employers are willing to deal with the paperwork. (We were.)  And, the interest the employee pays on the loan goes directly to their personal accounts.

(Note that Solo 401(k)’s are limited to 25% of compensation of the solopreneur.  And, many such plans have no profit sharing component.  But, for those who have employees, this vehicle  may not be the best proposition.)

Why this whole spiel?

Well, back when we started our program, it was normal for folks to put aside 10, 12, 14% of their annual  disposable income- nowadays that percentage is closer to 5! And, folks nearing retirement (55 to 64) have only put away $ 14,500 on average (but those who do have a retirement account, about 59% of this population segment, have scurried away about $ 105,000.)

And, we all need to recognize that retirement comes much earlier than we think.