Getting your new retirement plan started out right means matching your business and employee needs with the plan options that will best suit them during the set up process. Careful planning during this planning phase can help you avoid plan mistakes that can later consume your time and increase fiduciary risk. When building your plan, keep these mistakes in mind so you make the right choices for your needs.
MISTAKE #1: Choosing the wrong type of plan for your needs.
Choosing a plan that's not compatible with your business needs and administrative abilities can devour your time and lead to unwanted headaches. That's why it's so important to carefully consider factors like the size of your business, your preferences for funding the plan (with employee or employer money, or both), and your ability to manage plan administration. There are a variety of retirement plan types, two often used include:
- SIMPLE IRA plans that are built specifically for small businesses with low costs, easy set up and administration – no annual compliance testing required.
- 401(k) plans that offer higher savings limits and more plan design flexibility but generally involve more plan administration and require annual compliance testing.
MISTAKE #2: Not designing your plan to get better retirement outcomes for your employees.
Designing your plan to help employees achieve positive retirement outcomes helps them save enough money to retire when they are ready. Using automatic enrollment as a plan feature enrolls employees automatically in the plan upon eligibility – rather than requiring them to complete a paper-based enrollment form to join the plan. This takes the much of the necessary work – and decisions – out of employee hands at enrollment – and can get them started out right. Automation is widely used among retirement plans today, and it can make an impact on employees' retirement readiness.
Many plans using automatic features for better retirement outcomes are also reaching higher contribution amounts with automatic defaults. For example, better saving can be encouraged by setting the initial contribution rate – such as 6% – and pairing it with an automatic escalation feature – like an annual 1% increase or more – along with using a target retirement date fund as the plan default investment. Higher default rates give participants a greater chance of saving enough for retirement instead of coming up short on savings during retirement.
MISTAKE #3: Not making a matching contribution.
Not offering a plan match is a big missed opportunity for three reasons:
- It is a benefit many employees value and can make your benefits package more attractive to new hires.
- Contributions may be tax deductible as a business expense which may save your company money. It can be used to incent employees to save more in your retirement plan and get better retirement outcomes. Consult your tax or financial advisor with regard to your specific situation.
MISTAKE #4: Too many funds in the plan menu.
Getting the right balance of plan investments can be one of the biggest challenges for plan sponsors. Keeping the investment menu trim – but adequately diversified – helps simplify investing decisions for participants and helps you meet your fiduciary responsibility. Plus, an extensive list of funds may also be viewed as a lapse in fiduciary responsibility, as recent lawsuits have proven.
A plan that offers a set of diversified one-fund investing solutions like target retirement date funds, a redundancy-free core list of funds, and perhaps a brokerage window – will likely meet the investing needs of all your participants – from those who want to be active in their investing to those who prefer a "do it for me" approach.
MISTAKE #5: Overpaying for plan and investment fees.
Plan and investment fees can impact retirement savings over time, so it's important – and your fiduciary duty – to ensure fees are "reasonable." According to the sixteenth edition of the 401k Averages Book, average fees in 2015 were 0.01% lower for small plans and 0.06% lower for large plans, a trend that is likely to continue.
When making plan choices, be sure there are no hidden fees, it is easy for you and your employees to understand the costs associated with the plan.
MISTAKE #6: Choosing the wrong provider.
Your retirement plan shouldn't take you away from focusing on other important business needs. Plan administration can be easy to manage – when you choose the right plan provider. Whether you're starting a new plan or transitioning from another provider, it's important to work with a plan provider that puts your plan's best interests first. It starts with helping you with designing the right plan to help your employees get retirement ready and be easy to manage — so you can stay focused on your business.
A retirement professional can provide you with information about your plan options and help you decide which plan type may best fit your needs. You can also read our guidebook, How to Choose a Retirement Plan for Your Small Business.
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