How to Maximize Your Small Business 401(k) and Avoid Common Mistakes
When it comes to retirement savings, a 401(k) is one of the most valuable tools available for small business owners and employees alike. However, many individuals make common mistakes that can hinder their ability to maximize the potential of their 401(k).
Here’s how to navigate your small business 401(k) like a seasoned pro—no matter how long you’ve been investing.
Understanding the Basics of a 401(k):
Before delving into the mistakes, it’s essential to grasp the fundamentals of a 401(k). A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary before taxes. These contributions and any employer matching are invested into stocks, bonds, and other financial instruments. It grows tax-deferred, earning interest until withdrawal during retirement.
If you or your small business employees want more information, check out all the reasons a small business 401(k) is one of the most important ways to save for the future.
Ubiquity Retirement + Savings has your back when it comes to small business 401(k) plans. With our help, you can avoid mistakes like these:
Mistake #1: Not Taking Full Advantage of Employer Matching
One common mistake is failing to take full advantage of employer-matching contributions. Employers often offer a matching program where they contribute a percentage of the employee’s salary to the 401(k).
The flip side of this is that as a small business owner, you could be entitled to tax deductions by offering a 401(k) match to your small business employees. Make sure you (and your employees) aren’t leaving free money on the table!
Mistake #2: Neglecting to Increase Contributions Over Time
Another mistake is not increasing contributions over time. It’s crucial to periodically reassess your financial situation and aim to contribute a higher percentage of your income as your earnings grow. Gradually increasing your contributions ensures that you are consistently saving more for retirement.
Mistake #3: Ignoring Investment Diversification
Diversification is key to managing risk in your 401(k). Neglecting to diversify your investments by allocating funds across different asset classes can expose your savings to unnecessary volatility. It’s essential to spread your investments among stocks, bonds, and other options based on your risk tolerance and time horizon.
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Mistake #4: Withdrawing Funds Prematurely
One significant mistake is withdrawing funds from your 401(k) before reaching retirement age. Withdrawals before you’re 59 ½ incur not only taxes, but also penalties.
Mistake #5: Failing to Rebalance the Portfolio
Over time, the performance of your investments can deviate from your desired asset allocation. Market conditions, economic factors, and personal circumstances can change over time, impacting the performance of your employee’s investments and the overall efficacy of your plan. Failing to rebalance your portfolio regularly can result in an unintended concentration of risk. Periodically review (annually, at a minimum) and rebalance your investments to ensure they align with your long-term goals.
If you’re the sponsor of a small business 401(k) plan, it can be helpful to survey your employees to make sure the retirement plan options you offer actually provide them with the resources they need to save for retirement.
Mistake #6: Overlooking Roth 401(k) Options
Whether you’re a small business owner, plan sponsor or employee, taking advantage of a Roth 401(k) can be beneficial.
A Roth 401(k) allows contributions to be made with after-tax dollars. While this means you don’t get an immediate tax break, withdrawals during retirement are tax-free. Depending on your financial situation, a Roth 401(k) can be valuable to your retirement savings strategy.
Mistake #7: Not Reviewing and Adjusting Plan Provisions Regularly
It’s important to review and adjust your provisions within your small business’s 401(k) plan regularly. Whenever your business grows, shrinks, or otherwise changes, review your plan documents to be sure that your plan is delivering the retirement solution you need. If you are a sole proprietor just about to hire some new staff (congrats!), you’ll need a retirement plan that covers them too.
Or if you are hoping to avoid some of those pesky IRS compliance tests, you may opt to get a Safe Harbor provision added to your plan. There are lots of plan options, so talk with your plan provider to make sure you know what’s available to you.
Mistake #8: Choosing High-Fee Plans
For employees, fees associated with 401(k) investments can eat into your returns over time. And for small business owners, a 401(k) plan provider with high pricing or percentage-based fees can end up costing more than you budget for.
Many individuals make the mistake of selecting funds with high expense ratios, resulting in reduced long-term growth. When choosing a 401(k) plan for your small business, seek out a provider who offers flat fees1, transparent pricing, and is well-reviewed. (Have you met Ubiquity?)
Mistake #9: Relying Solely on the 401(k) for Retirement Savings
While a 401(k) is an excellent retirement savings vehicle, relying solely on it may not be sufficient. It’s essential to diversify your retirement savings by exploring other options such as individual retirement accounts (IRAs) or taxable investment accounts. This diversification can provide additional flexibility and potentially higher returns.
Mistake #10: Not Seeking Professional Guidance
Navigating the complexities of retirement planning and maximizing your 401(k) can be challenging. Many individuals do not seek professional guidance from financial advisors or retirement specialists. A knowledgeable expert can provide personalized advice, help you avoid costly mistakes, and create a comprehensive retirement strategy tailored to your needs.
1 Decimal, Inc. charges flat fees for recordkeeping and administrative services. Third-party service providers may assess asset-based fees to customers. We advise Plan Sponsors to review all service agreements with providers, such as investment advisors, custodians, and broker-dealers, to evaluate the total cost of the plan.
Ubiquity is not a registered investment advisor, and the information provided herein should not be considered legal or tax advice. We recommend consulting with your financial planner, attorney, and/or tax advisor for personalized advice.