Avoid These Top Mistakes in Your Small Business 401(k)
Author: Siân Killingsworth / 4 Apr 2023 / 401(k) Plan Information, Personal Finance
When it comes to retirement savings, 401(k) plans are a popular option for small business owners. From tax savings to employee retention, there are plenty of benefits to offering a plan to your employees.
However, managing a 401(k) plan can be tricky, and small mistakes can have big consequences. So we’re breaking down the most common slip-ups small business owners make when it comes to 401(k) implementation and management… and how you can avoid making them.
Mistake #1: Not Offering a 401(k) Plan
Right out of the gate, failing to offer a 401(k) plan can make it difficult to attract and retain talented employees, which can hurt your business’s bottom line. It can be relatively inexpensive to implement a 401(k) plan, and doing so will automatically make your small business able to offer a benefits package that can compete with the big guys. It’ll also give your small business tax benefits and enable you to contribute to your own retirement.
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Mistake #2: Choosing the Wrong Plan Provider
Not all plan providers are created equal! Choosing the right plan provider is essential for small business owners who want to set up a 401(k) plan. Make sure you’re picking a plan with low fees, transparent pricing, and experience working with small businesses. (Allow us to reintroduce ourselves.)
Mistake #3: Failing to Monitor Plan Fees
One of the most significant mistakes that small business owners make with their 401(k) plans is failing to monitor the fees. If your plan is too expensive, or has hidden fees, or is just plain wrong for your employees, they won’t want to participate. Ubiquity offers transparent pricing and low, flat fees1 to keep your business’s 401(k) plan affordable and easy for you and your employees.
Mistake #4: Not Diversifying Investments (or Offering too Many)
Investing too heavily in a single stock or asset class can be risky, and it can lead to significant losses if that investment performs poorly. On the flip side, offering too many can lead to analysis paralysis. If you can, work with your plan provider to ensure your plan offers sufficiently diverse investment options that your employees can pick from based on their risk tolerance and other factors.
Mistake #5: Neglecting Compliance Requirements
401(k) plans are subject to various compliance requirements, including annual testing to ensure the plan is not discriminating against certain employees. As a small business owner, it’s your responsibility to work with your plan provider to make sure you meet all of your plan’s compliance requirements. Failure to do so could result in significant penalties and legal consequences.
And don’t forget about some legal details that work in your favor — such as updated contribution limits. These increase annually with inflation and set the maximum contribution that individuals are permitted to make. In 2023, you can save up to $22,500 (or $30,000 if you are age 50 or older). Find out all the details on contribution limits here. High earner? Learn about that here.
Mistake #6: Not Reviewing and Updating the Plan Regularly
Make sure your 401(k) is FOMO-free. Regularly review and update your 401(k) plan to ensure it’s still meeting the needs of your business and employees. This includes updating the plan’s provisions, adjusting contribution limits, or upgrading your plan when your business grows. If you don’t, you could miss opportunities for savings and investments.
Mistake #7: Not Matching Employee Contributions
Want to incentivize your employees to use your small business’s 401(k) plan? An employer match is probably right for you. By matching your employees’ contributions, you encourage them to save for retirement. It also makes it easier for you to keep and retain top talent, minimizing time and resources needed to backfill roles.
Mistake #8: Not Communicating Effectively with Employees
Clear communication is vitally important in many things in life—and managing a 401(k) plan is no exception. Be sure you’re taking the time to educate your employees about your small business’s 401(k) plan offerings, including its benefits, investment options, and contribution limits.
We also recommend offering company meetings to review plan provisions, providing online resources, or working with financial advisors to provide one-on-one advice. This will help ensure your employees are using the plan to its full potential (and making informed decisions about their retirement savings.)
Flat fees are charged by Decimal, Inc. for recordkeeping and administrative services. Third-party service providers may assess asset-based fees to customers. Plan Sponsors are advised to review all service agreements with providers (e.g., investment advisors, custodians, broker-dealers) to evaluate total plan costs.
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.