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January 22, 2025

Maximizing 401(k) Plans for Businesses to Avoid Five Common Pitfalls

For small, medium, and even large-sized business owners throughout Orange County, a well-structured 401(k) plan is more than just a perk or retirement benefit—it’s a powerful tool to attract and retain top talent, and also helps businesses meet regulatory compliance. This financial benefit not only enhances employee satisfaction, but also helps generate long-term growth and compliance.

Financial advisors play a pivotal role in helping companies navigate the complexities of 401(k) planning that can be challenging for many small businesses. Even well-intentioned efforts may fall short, due to common but avoidable mistakes. These common mistakes can limit the effectiveness of these types of plans and expose businesses to unnecessary risks.

Here are three critical pitfalls to avoid, ensuring businesses get the most out of their 401(k) plans.

Mistake #1: Not Clearly Defining Fiduciary Responsibilities

A common oversight for businesses is failing to clearly define fiduciary responsibilities, leading to confusion and potential legal issues. Employers act as plan sponsors and hold ultimate accountability for their 401(k) plans, making fiduciary education essential.

Understanding Fiduciary Roles - Fiduciaries can be thought of as a team that helps ensure a smooth and compliant operation of your 401(k) plan. Depending upon the size of your business, one or more executives can wear one or more hats. Each member has distinct responsibilities including:

Plan Sponsor - Sets the strategic vision for the plan and ensures compliance with regulations
Named Fiduciary - Oversees operations and ensures decisions are made in participants’ best interests
Trustee - Safeguards and manages the plan’s financial assets responsibly
Plan Administrator - Handles daily operations and ensures rules are followed

Fiduciaries are like key players on a team, each with a specific role to ensure the plan runs smoothly and benefits everyone involved. For example, the Trustee acts as the financial quarterback, protecting assets and ensuring prudent investments, while the Plan Administrator is like the team coach, and ensures everyone follows the playbook, by adhering to rules and managing daily operations effectively.

Benefit Equity Inc. simplifies these roles for businesses in these ways:

Providing fiduciary education to ensure all parties understand their responsibilities
Offering compliance solutions to mitigate risks and prevent legal exposure
Acting as a trusted partner to streamline plan management and documentation

Action Steps for Employers

Understand Fiduciary Duties - Adhere to federal rules like ERISA standards to act in the best interest of plan participants and minimize risks through diversification.
Seek Expert Guidance - Partner with a Retirement Plan Consultant (RPC) aka Third-Party Administrator (TPA) like Benefit Equity, Inc. who simplifies compliance and mitigates legal exposure.
Document Processes - Keep clear records of plan decisions, updates, and compliance measures to avoid misunderstandings.
Hold Each Other Accountable - Advisors should empower and hold plan sponsors accountable for their fiduciary roles, ensuring all parties are aligned.

Mistake #2: Overlooking Strategic Plan Design

A 401(k) plan’s design directly impacts its effectiveness in achieving business goals and meeting employee needs. A one-size-fits-all approach often fails to align with a company’s unique objectives.

Crucial Design Elements to Include in Retirement Plan

Eligibility Criteria - Define who can participate in your company’s retirement plan.
Employer Contributions - Decide on matching, profit-sharing, or Safe Harbor options that balance employee incentives with company budgets.
Vesting Schedules - Encourage long-term participation while maintaining employee retention.
Loan Provisions - Allow participants to borrow from their accounts, assuming this aligns with your business goals.

An example of the above would be to offer a six year vesting schedule that would help increase employee retention and loyalty, while remaining competitive with your benefit package.

Solutions that Wealth Advisors Can Offer Clients

Tailored Recommendations - Customize plan features based on workforce demographics and business objectives.
Education and Communication - Provide resources that explain the value of plan benefits in clear, relatable terms.
Compliance-Ready Retirement Plan Designs – all plan features meet regulatory standards and adapt to future changes.

Mistake #3: Neglecting Regulatory Updates

401(k) regulations evolve frequently, and non-compliance can lead to severe penalties. Staying informed about legislative changes is critical for businesses to maintain plan integrity.

What Employers Need to Consistently Monitor

Legislative Updates - Changes like those included in the SECURE Act 2.0 may affect eligibility and contribution limits.
Compliance Testing - Plans must pass nondiscrimination and top-heavy testing to remain valid. Nondiscrimination testing ensures that a 401(k) plan benefits all employees fairly, not just highly compensated employees. These are the ADP/ACP Tests. Top-heavy, testing checks—whether key employees such as owners or executives—hold a disproportionate share of plan assets. If Key employees hold 60% or more of the plan assets all eligible employees may have to receive a 3% of compensation contribution. These tests help maintain the plan's compliance and integrity and protect the interests of all participants.
Timely Reporting - Accurate filings such as Form 5500 are essential to avoid costly penalties.

An example of the above would be the tax act known as SECURE Act 2.0 that introduced provisions to make it easier for small businesses to offer retirement plans. Generally financial advisers will bring these opportunities to you, such as increased tax credits. Employers who regularly monitor these types of updates are able to take greater advantage of the opportunities that come into existence.

How Benefit Equity Inc. Supports Compliance

Proactive Updates – Benefit Equity Inc. shares timely information about regulatory changes with clients.
Streamlined Processes – Benefit Equity Inc. handles complex compliance tasks, reducing administrative burdens on employers.
Audit Preparation - Benefit Equity Inc. equips businesses with tools and documentation necessary for seamless retirement plan audits.

Conclusion

By creating well-designed retirement plans, handling ongoing retirement plan administration, and helping wealth advisors stay ahead of regulatory changes, Benefit Equity Inc. becomes a valued and vital resource for wealth advisors.

What’s Next? Contact Benefit Equity Inc. today for a free compliance assessment or consultation. Call us at 714-480-1364, visit our website at www.BenefitEquity.com, or email us at info@benefitequity.com to learn how we partner with wealth advisors to bring greater value to their clients.

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