You can’t control the weather, but you can plan for a smoother retirement

In general, Iowans are a hardy group of people. The weather for the past month has challenged us as we have faced bitter cold, snow (and more snow), wind, and ice. Yet, we are often reminded by our friends in places like Florida and California that free choice is involved.

While there are certainly elements of truth to their comments, in practice it is much more complicated. Careers and family commitments are just two things that make it difficult to simply pick up and move. Even without constraints, timing issues often impact our mobility

Plan to understand

Limitations and conditions are simply a fact of life. Employees with Employee Stock Ownership Plans (ESOPs) at times find there are limitations as to when they can access their retirement funds. But like life, the more we understand them the more we can plan for them.

So how are ESOPs different than other retirement plans, such as 401(k)s? ESOPs are typically annually valued. Therefore, your account balance is accurately known only once a year. Retirement distributions are usually available after the end of the plan year in which you retire. An example may help to highlight this. Assume that a company and its ESOP operate on a calendar year basis. They will receive an annual valuation of the company, most likely completed in the March – May timeframe. That valuation is as of December 31. If you retire after December 31, you would have to wait until the following year for the next valuation.

Once the valuation is complete a distribution window opens (a set period of time to access your ESOP retirement funds) for those who retired on or before December 31. That is typically the only time during the year you can sell your shares.

These terms give the company more control over planning for their cash flow requirements. Other retirement plans do not typically rely on the company to provide the cash necessary to pay the balance upon a benefit event (e.g. termination, retirement, death, disability). An ESOP participant needs to plan for potentially having to wait a year or more to have access to their account balance due to this unique requirement.

Explore options and prevent surprises

Advanced planning can alleviate these concerns. Many employers that sponsor ESOPs also sponsor other retirement programs, such as a 401(k). Contributing to the other retirement plan can provide the money needed to bridge the time period until the ESOP funds are available (and provide for diversification).

The employee can also time their retirement to minimize the time needed to have access. In the calendar year example above, retiring on December 31st rather than January 2nd can make a year’s difference on when funds become available.

Engaging a financial professional can help you understand your benefit plan and the options available to you. The plan sponsor may be able to recommend someone who understands the ESOP and its requirements. Taking time to understand your benefits and their requirements can prevent surprises and allow for a good transition to retirement.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs.  Follow @twitter 

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