7 Top 401(k) Plan Features

Author: Jay Jacob / Reviewer: Callie Adams Farnsworth, QKA, CAFCA
14 Mar 2023 / 401(k) Resources

When it comes to 401(k) plans, many options exist. You want a plan that will give you the flexibility and features to meet your needs while keeping costs low–and probably some other features, too. Here are our top features to look for when picking the small business 401(k) plan that’s right for you.

Low fees.

The best 401(k) plan providers offer low fees. At many 401(k) plan providers, fees are usually expressed as a percentage of assets under management (AUM), so looking at this metric is one way to compare plans from different providers. For example, if one company charges 0.5 percent in annual fees while another charges 1 percent per year, then the former will cost half as much over time–but only if you have enough money each year to cover those fees.

However, you should look for a provider that doesn’t charge AUM fees at all. Why? Because these fees will increase as your savings grows. And that, over time, will chip away at your savings. …which it likely will do, based on how the stock market has performed historically over a 20-30-40-year time period.

Instead, seek a 401(k) plan provider like Ubiquity that only charges a flat fee. This type of fee remains the same no matter how big your savings balance gets. Between the lower overall fee you’ll pay and the additional compounding interest you’ll earn on the money you’ll save with flat fees, you could end up with tend of thousands more in the bank when you finally retire.

A variety of investment options.

When you’re choosing a 401(k) provider for your small business, one of the most important features to look for is a wide variety of investment options. You want to offer enough investment types so your employees can choose an option that matches their risk tolerance and goals. This might include individual stocks, mutual funds, ETFs (exchange-traded funds), and bonds.

The ability to borrow from the account.

Although it is not recommended, sometimes borrowing from your 401(k) account is necessary. Interest on loans is paid back to the participant and the only time they will get taxed on it is if it goes into default when not making payments.

Flexibility.

Flexibility is a must-have for any 401(k) plan. It’s important to be able to make changes quickly, especially if your business or your employees’ needs change. You should be able to:

• Upgrade to a more robust plan (for example, when expanding your business from that of a sole proprietorship to one with multiple employees).
• Make changes to the contribution amount.
• Change beneficiaries at any time.

Automatic enrollment.

Automatic enrollment is a great way to get employees to participate in their 401(k) plan. If you’re looking for a way to get your staff members saving for retirement, automatic enrollment is one of the best ways to do so.Plus, when you set up your company’s 401(k) with automatic enrollment, the government will reward you with $500 in tax credits per year for the first three years.

By setting up automatic enrollment, you can help ensure that your employees are able to save money for retirement without any additional effort on their part, and you get a nice tax break!

Employer contributions.

Making contributions to your employees’ retirement accounts is a great way to help your employees save for retirement and is a prime way to maintain a competitive benefits package. This is helpful when you’re trying to attract new talent or want to reduce turnover.

Some small businesses choose a Safe Harbor 401(k) plan, which requires employer contributions, but the benefit to you as a small business owner is that this type of retirement plan exempts you from certain IRS tests. That can save time and prevent stress. And don’t forget — all employer contributions to employees are tax deductible.

Auto-escalation.

Auto-escalation is a feature that automatically increases your contribution rate every year. It’s worth noting that auto-escalation can be set to different rates, depending on the plan you choose. For example, some plans will increase your contribution by 1% each year until it reaches 6%. Others may have an initial default rate of 2% and then increase it by 1% per year until reaching 10%.

If you’re not sure how much money you can afford to contribute each year or if you want extra incentive to save more money into your 401(k), auto-escalation could be beneficial because it means there’s no need for guesswork on your part.