6 401(k) Secrets – What You Need to Know

Author: Siân Killingsworth / 7 Dec 2022 / 401(k) Plan Information

What’s the secret to successful 401(k) investing? For many people, a 401(k) retirement account is their largest asset, perhaps worth more than their home. Successful 401(k) investment can mean the difference between a comfortable retirement or a struggle once you stop working.

The types of 401(k) plans for small businesses and sole proprietors don’t differ much from the plans for larger companies in the way they work. The latter is just more complex. Individual, solo, and self-employed 401(k) plans for small businesses and sole proprietors are very similar. In a self-directed 401(k) plan, employees choose where to invest their money rather than rely on the employer to decide where to invest these funds.

Want to know how to best manage your small business retirement plan? Here are six 401(k) secrets you need to know:

 

1. Take Advantage of 401(k) Matching 

One of the major advantages of 401(k)s is that many companies offer employees a match. This is free money and an ideal way to save. Typically, companies match up to 6 percent of employee contributions. Some employers use a very generous matching formula while others choose not to match employee contributions at all. Note that not all contributions to your employees’ retirement plan are due to matching. Specific terms of a 401(k) retirement plan can vary. The plan document will contain details on how your company’s 401(k) works.

 

2. Contribute Up to the Limit 

Contribute as much as you can to your 401(k) each year. For 2023, those younger than 50 can contribute up to $22,500. Those age 50 or older can put in an additional $7,500 in catch-up contributions. Maxing out your contributions can play a huge role in the quality of your retirement. Review all the 2023 limits here.

 

3. Diversify, Diversify, Diversify 

It’s impossible to overstate the importance of diversification when it comes to your 401(k). Spreading risk is the basis of successful investing, and that certainly includes your 401(k). A mix of stock and bond funds, rebalanced regularly to reflect your risk tolerance as you get closer to retirement, is the easiest way to diversify.

The federal government takes investment fiduciary responsibilities very seriously. Businesses are subject to Department of Labor (DOL) audits and investigations to verify that their retirement plans offer responsible investment options with reasonable fees. If they don’t, the business can face stiff penalties, as well as litigation from any employees who are paying excessive fees or have too few investment options that adequately match their risk-tolerance profile.

For all these reasons, more businesses are choosing retirement plans with 3(38) investment fiduciary services, such as a Ubiquity Censibly Yours plan in order to access a greater variety of investment options.

 

4. Vesting Incentivizes Employees to Stay 

It’s in the best interest of employees to remain employed for at least as long as it takes to become fully vested in their 401(k). Otherwise, they lose all or most of the match from their employer. Employers have the ability to choose the rate of vesting, and many select a one-, two-, or up to six-year employment requirement for vesting eligibility.

 

5. Don’t Touch Your 401(k) Until Retirement 

Yes, emergencies happen. When circumstances are dire, you may have no choice but to tap your 401(k) to pay expenses. However, doing so is always a last resort as it could significantly affect your retirement.

While it’s possible to take out 401(k) loans, you’ll incur fees and penalties if you fail to repay. On the other hand, if you take a hardship distribution in the event of a financial emergency, it is not a loan, so you cannot put the money back into your 401(k) later.

If you cash in your 401(k) prior to retiring, expect to pay taxes. The money is not tax-deferred. If you take withdrawals prior to reaching age 59.5, you may get hit with a 10% early withdrawal penalty as well as paying income taxes.

Some people plan to keep working well into their retirement years to make up for their lack of retirement planning and saving. However, working longer may not be an option. Many current retirees say they had to retire earlier than they planned because of health problems or unforeseen changes within the company they were working for. Taking steps today to prepare for what you want to happen in the future will leave you better prepared to handle surprises along the way.

 

6. Think Long-Term 

A 401(k) isn’t a short-term investment and shouldn’t be treated that way. Develop a long-term investment strategy with the help of a financial advisor and review your portfolio annually, if not quarterly. Chasing the hot stock or sector of the moment isn’t usually an effective strategy. Attempting to time the market is a great way to lose money, while staying the course and sticking to your goals is a smart way to avoid emotion-driven, impulsive decisions that may derail your retirement.

Customized 401(k) plans for small businesses do more than help you and your employees save for retirement. These plans help you attract and keep employees. For more information and to schedule a free consultation, contact Ubiquity.

 

Ubiquity is not a registered investment advisor, and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.