3 Traps to Avoid When Seeking out the Best 401(k) Plans


In addition to providing retirement benefits for small business owners and their employees, the 401(k) plans are able to significantly lighten the burden of annual income taxes. While good plans can positively impact your business and your staff, however, there are also some serious landmines to look out for as you choose the right provider for your company’s plan. It’s important for business owners like yourself to understand what to look for in the best 401(k) plans and know how to quickly recognize any potential traps or pitfalls.

Unfortunately, a great deal of today’s 401(k) plans are laden with conflicts of interest which can lead to negative performance rates. Ultimately, these problems can completely undermine your ability to provide a plan that is in the best interest of your employees. Finding the best 401(k) plans and providers, on the other hand, can significantly improve the lives of yourself and your staff post-employment while simultaneously easing up your tax burdens and lower the costs of your plan.

Common traps for small business owners

All of this having been said, here are 3 common traps for small business owners to watch out for and avoid when striving to select the very best in 401(k) plans.

1. Investment Bias

Some providers offer their own funds within the 401(k) plans that they sell. Regardless, it is critical that business owners guard themselves against any investment bias towards these provider’s funds. Look for investment advisors who are willing to take an objective look at all of the market’s current offerings and choose the top funds by asset category. Providers should be concerned with the right asset allocation of your funds, splitting funding wisely between both stock market based investments and fixed income investments. Lastly, make sure that you and your employees will be given some freedom with regards to your funds. Your provider shouldn’t take charge of all of your assets, but rather, should leave a portion of your funds to be invested as you choose in order to avoid any bias and to yield the highest possible returns.

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2. Employee Expenses

It is common that in most 401(k) plans there will be expenses such as investment, recordkeeping, administration, trustee expenses, etc. which are generally covered (in varying degrees) by your employees. In smaller plans, it is fairly typical that employees will be required to pay 1.5% or more for these types of services and expenses. In this case, “smaller plans” refers to 401(k) plans with total balances of less than $1 million. Regardless of business or plan size, however, the best 401k plans, are capable of charging less than a total of 1% to participants, no matter what the state of the plan’s asset balance. This allows small businesses to enjoy the same treatment as much larger firms and plans pay. Ultimately, this can make a huge difference in how much both yourself and your employees are able to save for retirement.

3. Poor Plan Protection

Even though a 401(k) provider may give you a large list of funds which you will be able to select your small business‘s fund line-up, many of these same providers will not take on the responsibility for these funds. Should your employees complain about the fund options or if you are ever audited, all of the responsibility will fall upon you to correct any issues. Every business is supposed to put together an Investment Committee of employees who will regularly review your company 401(k) plan in order to monitor funds and to ensure that the investments remain the best options. If your small business does not have the resources or in-house expertise to assemble such a committee, there is still hope. By enlisting the help of a provider that will take on the role of Investment Manager, you can rest assured that your company will offer the best of the 401(k) plans and options available and that your plan will be fully protected.

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The 401(k) is the starter plan for primarily employee benefits purpose. If you are successful business owner and need to reduce your income tax liability substantially then, defined contribution plan such as “profit sharing plan” or “defined benefit plan” can be combined with the best 401(k) plan.

We have advised on the thousands of such plan designs. Please feel free to contact us at customercare@beamalife.com or (877) 972-3262.