Your Small Business' 401(k) Plan Might Accidentally Be Shortchanging Your Employees

Date: December 07, 2016

A new report finds most 401(k) plans are outdated, and it lays out ideas to shape better plans for the future.

Even with good intentions, owners’ 401(k) plans could be costing their employees hundreds of thousands of dollars. 

That’s because many of these plans are not consistent with the changing times, according to Bloomberg analysis. That article pulled from a new report from the U.S. Government Accountability Office (GAO) that reviewed 80 401(k) plans that range from fewer than 100 participants to more than 5,000.


Some of the outdated requirements found in the report: 

•   Workers must be 21 before becoming eligible to join a 401(k)

•   Workers must work at the company for a full year before becoming eligible to join a 401(k) (and then wait an additional year to be eligible for matching funds)

•   Workers must wait up to six years before laying claim to all those contributions

“Being ineligible to save in a new employer’s plan for one year on 11 occasions, especially occurring more frequently early in a worker’s career, may result in $411,439 less retirement savings ($111,454 in 2016 dollars),” according to the report.

But the report does have potential flaws. For instance, it assumes that an employee works continually from age 18 to 66 and that the stock market’s nominal long-term return will be 9.1 percent. 

The GAO recommended that employers re-evaluate their policies given that 70 of the 80 plans in the report hadn’t changed their vesting policy in the last five years. “A re-evaluation of these caps would help to assess whether they unduly reduce the retirement savings of today’s mobile workers,” the report noted.

All this being said, small businesses still have many 401(k) options to offer their employees. Employee Fiduciary, a Mobile, Alabama-based 401(k) plan provider for small businesses, released a 401(k) plan design study that “summarizes the different contribution types used by 2,767 401(k) plans, averaging 25 participants and $947,000 in plan assets.” 

Some of the study’s key findings:

•   68% of plans use a safe harbor 401(k) plan design to avoid annual tests for actual deferral percentage/actual contribution percentage (ADP/ACP) and for being top heavy.

•   Only 8.71% of plans automatically enroll employees who fail to make an affirmative enrollment election.

•   65.96% permit after-tax Roth 401(k) contributions

•   64.37% permit non-safe harbor employer-matching contributions

•   85.65% permit employer profit-sharing contributions 

“401(k) plans are not a one-size-fits-all proposition,” said Eric Droblyen, president and CEO of Employee Fiduciary. “Small businesses have nearly countless 401(k) options. During the plan design process, a company chooses amongst these options based on their 401(k) objectives and budget. This process can have a material impact on a company’s bottom line, so it’s important for 401(k) fiduciaries to take it seriously. It’s not uncommon for a company to save tens of thousands of employer contribution dollars by choosing one design over another and yet still meet their 401(k) plan goals.” 


Why Small Business Owners Should Care About 401(k)s

What Retirement Plan Should You Offer Employees?

Is the Roth 401(k) Retirement Plan Right for Your Company?

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