Not all 401(k) plans are created equal. Plans with minimal administration fees and top-rated investments can deliver dramatically higher returns for participants than plans with excessive fees and underperforming investments. Over time, these higher returns can help participants retire years sooner. Given the stakes, I recommend you settle for no less when saving for retirement.
When a small business offers a 401(k) plan, it’s often a win-win for business owners and employees. A 401(k) plan can help businesses attract and retain talent, incentivize performance, and lower taxes, while helping employees – including the business owner – meet their retirement goals. If you're a business owner, you've probably asked yourself at some point what you and your employees stand to gain by offering a 401(k) plan. The answer is probably a lot. Here are some of the top benefits.
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To plan for retirement, 401(k) participants should set a savings goal and develop a strategy for reaching that goal. To reach their goal at the lowest out-of-pocket cost, I recommend participants follow a simple 4-step strategy – start early, contribute regularly, invest appropriately, and lower fees. However, to reach their goal as soon as possible, participants will need some help from their 401(k) plan. Here are the three 401(k) plan features that can help any saver – including you – retire years sooner.
401(k) plans must operate according to the terms of a written plan document to meet IRS qualification requirements. Most plans use an IRS “preapproved” document for this purpose. These documents must be fully rewritten (or “restated”) every six years to reflect recent law changes. The last 6-year restatement cycle was called “PPA” after the Pension Protection Act of 2006. A new cycle - called "Cycle 3" or "Post-PPA" - opened last year. From August 1, 2020 to July 31, 2022, all pre-approved 401(k) plans must be restated onto a post-PPA document.
Each year, 401(k) plans must pass certain IRS-mandated nondiscrimination tests to confirm Highly-Compensated Employees (HCEs) do not disproportionately benefit and no IRS contribution limits are exceeded. These tests are often completed soon after the close of the year so test correction and tax deduction deadlines are not missed. For calendar-based 401(k) plans, that means now.
401(k) providers can charge “direct” and/or “indirect” fees for delivering plan administration services such as asset custody, participant recordkeeping, Third-Party Administration (TPA), and professional investment advice. The difference between the fees is how they are paid. Direct fees can be paid by the plan sponsor or deducted from participant accounts, while indirect fees increase the cost of plan investments – reducing their returns. If you’re a business owner, I strongly recommend you avoid indirect fees for two reasons – 1) they lack the transparency of direct fees – which makes excessive 401(k) fees harder to avoid and 2) they could limit your access to top 401(k) investments - which often pay no indirect fees.